The CARES Act provides for easy access to IRAs and other retirement plans for anyone who “experienced adverse financial consequences as a result of closing or reducing hours of a business that you own or operate.” Sounds like a great opportunity, right?
Let’s start by saying that retirement accounts for working people should be used only as a last resort. That being said, the CARES act includes a provision allowing you to withdraw up to $100k in total from your IRA or work Retirement Plan penalty-free if you were affected by the virus. To qualify, either you or your family must have had a coronavirus diagnosis or you have experienced other financial hardships directly related to this pandemic crisis.
Please note that that this is a PENALTY-FREE withdrawal and not a TAX-FREE withdrawal. Remember, you generally pay a 10% early withdrawal penalty in addition to federal and state income taxes on any withdrawals taken from your IRAs or other retirement accounts before reaching the age of 59.5. The new CARES ACT rule waives the penalty but not the income taxes due on these distributions.
The good news is that you can pay the taxes due on the money withdrawn from your retirement plans ratably over three years. Plus, you have those three years to replenish some or all the money that you have withdrawn, and you avoid paying income taxes on any retirement funds replenished.
Another option is to borrow against your 401k or 403b plan at work, including the 401k plan sponsored by your practice. Under the new rules you can now borrow your full vested benefit, up to $100k, from your work retirement account. Previously, the limit was the lesser of 50% of the account balance or $50k.
There is a huge pitfall associated with these 401k loans. If you leave your job before paying back the amount borrowed and are not able to repay the remaining loan at that time, the outstanding balance is treated as a taxable distribution subject to federal and state income taxes plus the 10% early withdrawal penalty if you are under the age of 59.5. You are generally required to repay your 401k loan over five years.
More info about these new Coronavirus-related retirement plan rules is available at: https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers.
Another recent development gives people until 8/31/20 to repay any Required Minimum Distributions taken so far in 2020, including RMDs from inherited IRAs. More info is available at: https://www.irs.gov/newsroom/irs-announces-rollover-relief-for-required-minimum-distributions-from-retirement-accounts-that-were-waived-under-the-cares-act.