What the CARES Act Means for Retirement Accounts

By Rebecca Lake

Saving for retirement can be challenging even at the best of times. But it can become even more difficult when a crisis hits. With the coronavirus pandemic battering the stock market and causing job losses, some people may be facing uncertainty about their retirement savings. Fortunately, the Coronavirus Aid, Relief and Economic Security (CARES) Act is providing some relief to retirees and pre-retirees by easing the rules for accessing retirement accounts. Here’s what you need to know about CARES Act provisions regarding your retirement savings.

If you’re strapped for cash because of the coronavirus crisis, you may be considering taking money from your retirement accounts early or borrowing from it to pay the bills. The CARES Act eases the conditions normally attached to those two options. One concerns early distribution; the other concerns borrowing from a defined contribution plan.

You qualify for these two options if you, your spouse or a dependent is diagnosed with Covid-19 or you have experienced adverse financial consequences from being laid off, furloughed, quarantined, having work hours cut or  being unable to work due to lack of child care or pandemic-related closures.

Ordinarily, you’d need to wait until age 59 1/2 to tap your 401(k) or traditional IRA without triggering a 10% early withdrawal tax penalty. The CARES Act creates an exception to that 10% early withdrawal penalty for hardship distributions related to the coronavirus crisis, as described above. The exception applies to withdrawals of up to $100,000 made between Jan. 1 and Dec. 31 of this year. If you’re taking a withdrawal from a 401(k) or IRA, it would still be considered a taxable distribution, but you’d have three years to pay the taxes owed. Also, if you choose to recontribute the money taken via the distribution exception – which you are not obliged to do – the IRS will treat the recontribution as a rollover for the 2020 tax year, meaning ordinary contribution limits will not apply.

If you need to borrow money and would rather not deal with a bank, the act doubles the amount you can borrow to $100,000, or 100% of your vested account balance (whichever is less) from your 401(k). This provision is for loans taken from March 27 to Sept. 23 of this year.  That’s double the amount you would normally be able to borrow from your 401(k). Loan funds are not taxable as ordinary income when they come out of the plan, whereas normal distributions are taxable. Remember that a loan has to be repaid, unlike a hardship distribution, and you have three years to do that. Failing to repay a 401(k) loan can result in it being treated as a taxable distribution which could make a loan an expensive way to access cash.

Finally, remember that early, hardship distributions and 401(k) loans should only be considered as a last resort. After all, you’re taking money from your own retirement and potentially missing out on returns from the market’s eventual recovery. Still, if you need cash to meet your immediate needs, either of the above may be viable options.

The minimum age for required minimum distributions from 401(k) plans and traditional IRAs recently increased to 72, up from age 70 1/2. If you’re in the age range for RMDs, being required to take money from your retirement savings when the market is down could mean withdrawing funds at a loss. For 2020, however, required minimum distributions have been suspended.

That means that unless you need the money in your 401(k) or traditional IRA right now, you can leave it alone for this year. The advantage is that you have an opportunity to recover some of the losses you may have suffered in your portfolio as a result of stock market volatility.

There are some things you can do to minimize the need to take RMDs, at least temporarily. For example, you could:

• Tap into cash savings.
• Borrow against cash value that’s accumulated in your life insurance policy.
• Take distributions from a Roth IRA  or Roth 401(k) if you have one since those wouldn’t be taxable.
• Consider other ways to generate income, such as doing consulting work from home.

Remember, this reprieve from RMDs won’t last forever so you’ll need to consider how you want to handle them for next year.

If you need to temporarily halt IRA contributions to pay for more immediate expenses, you have some time to get caught up with contributions.

For the 2019 tax year, you have more time to make contributions up to the annual limit to traditional and Roth IRAs, including SEP and SIMPLE IRA plans if you run a business or are self-employed. In extending the tax filing deadline to July 15, the IRS also extended the deadline for making contributions to these retirement plans.

Aside from the CARES Act’s new rules for retirement accounts, the economic turmoil of the coronavirus pandemic might have some savers considering their retirement saving and investing strategies. Here are a few things to keep in mind.

If you’re unable to work or your hours have been cut as a result of coronavirus, your ability to make contributions to your retirement accounts may be directly affected. And even those who are still employed might be reconsidering putting more savings into a volatile market.

The advantage of continuing to make contributions to tax-advantaged retirement plans is that you can benefit from both compounding interest and dollar-cost averaging over time. Buying stocks, mutual funds or other investments when the market is down means you could cash in on bargains as stock prices fall. When the market picks up again, you can reap gains as stock prices rise. And if your employer offers a matching contribution, you can benefit from what’s essentially free money.

With that said, your own personal economic circumstance may warrant temporarily pausing contributions so you can use the money to pay basic living expenses.

With coronavirus affecting the stock market and in turn, your retirement savings, it’s tempting to stop investing or change your asset allocation to shift away from stocks. While panicking is never a good idea, and market timing rarely works, it’s important to keep your timeline for investing and risk tolerance in mind so you have the right perspective on what to do.

If you still have several decades to go before retirement, for example, then you have a longer window of time for your portfolio to recover from financial losses. In that case, you might choose to maintain your current asset allocation or even invest more heavily in stocks if you’re buying bargains.

On the other hand, if you have five to 10 years until retirement or less you may want to take a more conservative stance. For example, bonds might look more appealing to you than stocks in terms of risk. Though you do have to keep in mind how zero interest rates will affect both bond prices and yields.

Coronavirus impacts to your retirement savings may be unavoidable but it’s possible to get through the crisis with the right planning and a level head. Looking at both sides of the equation, in terms of whether to keep making contributions or if you need to take money from retirement to cover your expenses, is important. And make sure you’re considering how your retirement savings may be affected not just in the short-term but in the long-term once your financial situation – and the rest of the world – begins to return to normalcy.

• Consider talking to your financial advisor about keeping your retirement savings on track. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
• Rebalancing can be helpful in managing a retirement portfolio but it’s important to get the timing right. Rebalancing means shifting your asset allocation back toward a target split between stocks, bonds and other investments. This is something you may want to consider whenever markets begin to stabilize.

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