Many Americans have a great interest in the rule changes regarding IRA and retirement distributions, as they try to find ways for supplementing their income during the current economic conditions. The CARES Act provides changes in distribution rules, allows higher loan amounts against retirement plans, and relaxes penalties for early distributions.

Here are some important facts about the Act:

  • The 10% penalty is waived for premature distributions taken, up to $100,000 from qualified retirement plans after January 1, 2020 and before December 31, 2020.
  • The distribution portion that is subject to income tax could be spread over a three-year period (2020-2022).
  • Taxpayers may pay back or re-contribute those distributions into the retirement plan over a three-year period, regardless of any amount that falls over the cap limit on the current years contributions.
  • The loan limit on retirement plans has now been increased from $50,000 or 50% of vested balance, to the lower of $100,000 or 100% of the vested balance from the enactment period March 27, 2020 until December 31, 2020. The due date for repayment is delayed one year.
  • Payments on existing retirement loans can now be deferred up to one year.
  •  Required Minimum Distribution (RMD) payments from IRAs or defined contribution plans are suspended for calendar year 2020.This suspension applies to plan participants, IRA owners, and individuals taking distributions as beneficiaries of a plan participant or IRA owner. The suspension does NOT apply to qualified defined benefit plans.
  • The mandatory 20% income tax withholding for rollover IRA distributions is suspended for distributions made from the enactment period to December 31, 2020. 

Questions and Answers:

Q: Should I refrain from taking my required minimum distribution?

It depends.If the effects of the pandemic have dropped your income into a lower tax bracket, it may be strategically wise to continue taking your RMD for the current year at the lower tax rate.

Q: What happens if I already have taken my required minimum distribution for the year?

Those RMDs already taken must be included and subject to tax in your 2020 tax return. However, the distribution qualifies under the Cares Act to be treated as a rollover if it is placed back into the same or another qualified retirement plan and rollover is completed within 60 days of the distribution.

Q: Do I have more time to make my 2019 IRA contribution?

Yes. The deadline for your 2019 IRA contributions is extended to July 15, 2020.

Q: Can anyone qualify for these special IRA and retirement plan distributions and expanded loan rules?

No. In order to qualify, the following conditions must be met:

    • The individual, spouse, or dependent must have been diagnosed with the COVID-19 virus
      or
    • The individual must have experienced adverse financial consequences as a result of being:
      • Quarantined
      • Furloughed
      • Laid off
      • Subject to reduced work hours
      • Unable to work due to lack of child care
      • An individual whose business has closed or work hours reduced

A retirement administrator can rely on the certification of the individual that he or she has meet the requirements.

Q: I own a beneficiary IRA. Am I also allowed to decline my RMD from this account?

Yes. The RMD is suspended for one year.

Q: Do I have to be sick to suspend my RMD in 2020?

NO. The RMD distribution is available to everyone. The purpose is to provide relief for taxpayers with IRAs that have been adversely affected by market conditions and it applies without regard to the impact of the corona virus on the taxpayer.