By Jim Baron
The Coronavirus Aid, Relief and Economic Security Act, now known as the CARES Act has potential implications for baby boomers (and others) that have an IRA or other tax-advantaged retirement account. It seems like there is something for everyone in the CARES Act. The challenge for all of us is getting the information, understanding it and applying it properly.
If you are currently retired and have a 401(k) or some other form of a retirement plan, you likely are familiar with the term, RMD, the required minimum distribution. This is the amount, depending on when you were born, you are required to withdraw from your tax-deferred account. Well, that requirement has been lifted for the year 2020. So depending on your individual situation, you have options. Maybe, for example, your account took a pretty big hit with the market slide in April. With this provision, you are allowed to leave your money invested so that you have a chance of gaining it back. Not a bad option if you do not need the money right now.
If on the other hand, you have been financially negatively impacted by Covid-19, (and who hasn’t), you can now take an early distribution without paying a penalty. That can be a big deal for some people as a 10% penalty was always a huge deterrent. Of course, you will have to pay it back, but you will now have three years instead of 6 months. In addition to the removal of the penalty, the amount that can be taken has been increased also. Of course, the devil is in the details, so it will really be important to talk to your financial / tax advisor before taking any action.
The pot is also sweetened for those who may be eligible to borrow from their workplace retirement account. Again, lots of details and going into those is beyond the scope of this overview.
This only scratches the surface of what you need to know about the options the CARES Act offers. And if you have some extra time on your hands and enjoy a challenging read, you can delve into the minutiae by reading the twenty page document that the IRS recently released. Here is a link to the “Guidance for Coronavirus-Related Distributions and Loans from Retirement Plans Under the CARES Act.” (That is what the document is called.) https://www.irs.gov/pub/irs-drop/n-20-50.pdf
It is great to have options as this is a very unusual situation we find ourselves in but as I said earlier, before charging ahead, make sure you check with your financial guru as there are some gotcha’s. Also, you want to be really cautious about taking money out of your retirement account when the market is down, because it takes that much more to make up the difference later.
Jim Baron recently retired from his executive management duties with the Northwest Washington Fair. He enjoys catching the biggest fish and showing his grandchildren how it is done. He can be reached at firstname.lastname@example.org