CARES Act and Coronavirus Stimulus Retirement Changes
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  2. CARES Act and Coronavirus Stimulus Retirement Changes

How does the CARES Act/Coronavirus Stimulus Bill affect my Self-Directed IRA?

The CARES act allows someone to do a penalty-free distribution of pre-tax dollars from the IRA. You then have 3 years to contribute the same amount back to your IRA.

What is the CARES Act?

Coronavirus Aid, Relief, and Economic Security Act is a bill passed by Congress in 2020 to respond to the rapidly evolving situation around COVID-19, unemployment, and disruption to income Americans are facing due to shelter at home restrictions and closing of non-essential businesses across the country. 

Do I have to take RMDs while my stock market accounts are down?

Required minimum distributions (RMDs) are suspended for 2020. These only apply to Traditional IRAs, pre-tax dollars in 401(k)s for those over 70 and 1/2. RMDs are also waived for inherited/beneficiary IRAs.  

What is the new distribution exception?

Anyone who qualifies (qualifications below) as being affected by the coronavirus pandemic can take up to a $100,000 distribution from their traditional IRAs. 

What does this mean for me?

  1. If you are below 59 and 1/2, you avoid the 10% tax penalty added to early distributions.
  2. If you plan on taking this money out of your retirement account permanently, you will be still taxed on this money as income, but can choose to pay the tax liability immediately or spread the tax liability over the next three years. 
  3. You can return your retirement funds to the IRA in a contribution over the next three years. This will allow you to avoid the tax liability completely. In short, this is an interest-free "loan" from your IRA as long as you follow the rules. 

Who qualifies?

  1. Someone who is diagnosed with the virus SARS–CoV–2 or with coronavirus disease 2019 (COVID–19) by a test approved by the Centers for Disease Control and Prevention,
  2. Whose spouse or dependent is diagnosed with such virus or disease by such a test, or
  3. Someone who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the IRS.

The last provision of the bill is very wide to allow IRA owners some flexibility to see if they qualify for a penalty-free distribution, or distribution and repayment.

What are some ways people can take advantage of this policy?

  • If you take money out as a distribution now, you can keep it out for three years, and refill your IRA by smaller contributions or one lump sum payment in 2022 tax year. 
  • You could take money out now, without a distribution penalty if you are under 59 1/2,  pay taxes all now or the next three years, and use that for essential expenses. You do not have to return the money to your IRA. Be aware of how this might affect your long term retirement goals. Historically, those who distribute money from their retirement account for an extended period struggle to catch up for lost time later in retirement. Consider this option with your family, current emergency needs, and any financial advisor or CPA that you visit with advice.