In March, the CARES Act put into motion several updates to the rules regarding retirement accounts and their tax advantages. Since then, additional retirement legislation and relief programs have been released that further expand how individuals can save or maintain retirement balances.
Early withdrawals: Access retirement funds without a penalty
For 2020, penalties are waived for those who need to access retirement savings early. That means there is no 10% early hardship withdrawal penalty for distributions up to $100,000 per person for COVID-19-related purposes, retroactive to January 1, 2020. This is good news for many people who have found themselves in dire financial straits due to business closures, shutdowns and other economic impacts.
The eligibility for early hardship withdrawals falls into a few categories. Some examples are:
- You or your spouse or dependent are diagnosed with COVID-19
- You have been laid off or furloughed, or your work hours have been reduced
- You are unable to work due to COVID-19
- Experiencing financial challenges due to COVID-19
Another change is that, while withdrawals are still subject to taxes or tax withholdings, taxes can be spread over three years. And you have three-year period to re-deposit the money into your retirement account, if you want (typically, you’re only given 60 days to redeposit a withdrawal). Speak with your financial and tax professionals to learn more about how these rules impact your distribution taxes and account.
Required minimum distributions (RMDs): Skip or roll back RMDs
Changes to RMD rules allow retirement accountholders or their beneficiaries to skip the RMDs for 2020. Additionally, if individual retirement account (IRA) accountholders took RMDs in 2020 before the new legislation, those RMD amounts can be re-deposited into the retirement account. This only applies to RMD amounts, so any non-RMD withdrawals are not eligible to be rolled back in.
Below is a summary of the new rollover relief for RMDs.
- The 12-month rule—which allows only one distribution to be rolled back into an IRA in a 12-month period—no longer applies to 2020 rolled-back RMDs. This change particularly helps those who have been receiving automatic retirement account distributions every month, or at regular intervals.
- The rollover deadline for RMDs has been extended to August 31, 2020. Previously the date was July 15, 2020. The July date still applies to non-RMD distribution rollovers.
- This relief applies to inherited IRA RMD distributions, which means the beneficiary of an IRA can roll their 2020 RMDs back into the IRA.
If you’re thinking: why would I want to re-deposit or skip my RMDs? It’s all about your plan. Leaving much of your retirement account intact during market volatility and an economic downturn could better position your funds for recovery later. And, if you can financially manage without your retirement account now, you could save those funds for a greater need down the road. Your financial professional can help you adjust your retirement planning goals to account for COVID-19 related impacts.
Retirement account loans: Higher amounts allowed for 401(k) lending
The 401(k) loan amount was doubled from $50,000 to $100,000—or 100% of the vested balance‡, whichever is lower. This change offers additional access to funds for those who may need financial assistance during the economic and health impacts of the pandemic. These types of loans can be used for any purpose, but not all retirement plan sponsors allow them, so check before you make plans to access your retirement funds this way.
Retirement planning adjustments
The pandemic has thrown many of us a curveball in our 2020 plans, but that doesn’t mean we should throw out our long-term view. These new legislations and rule changes provide increased flexibility in accessing and managing retirement accounts. However, you may want to consider staying the course and keeping as much of your savings and retirement planning roadmap in place as possible.
By design, retirement accounts typically operate with a long time horizon, meaning over time they can be re-allocated, balanced and adjusted to accommodate market shifts. Now is a good time to check in with your financial professional to talk through these changes and your retirement planning needs.
We’re continuing to closely follow any additional relief measures or rule changes and are here to help you understand what they mean for your personal situation. If you have questions about these changes or any other aspect of your plan, we are ready to help. To learn more about our pandemic response and relief, visit umb.com/COVID-19.
Securities and insurance products are:
NOT FDIC INSURED | NO BANK GUARANTEE | NOT A DEPOSIT | NOT INSURED BY ANY GOVERNMENT AGENCY | MAY LOSE VALUE