How the CARES Act Affects Certain Retirement Accounts

On March 27, 2020, President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security Act (i.e. CARES Act) into law. This $2 trillion stimulus package allocates funding for a variety of programs designed to help individuals and businesses coping with the COVID-19 crisis.

Among other provisions, the CARES Act provides some relief for individuals with retirement accounts – such as 401(k)s and Individual Retirement Accounts (IRAs) – and temporarily makes it easier for you to withdraw funds that you've saved. The bill also suspends tax penalties on eligible early distributions and sets more lenient rules for loans from certain types of retirement accounts.

Eligibility for New Retirement Account Programs

Keep in mind, not everyone who has a retirement account is eligible for the relaxed rules provided by the CARES Act. In order to take advantage of the early withdrawal and loan provisions, a qualified individual must have a valid Coronavirus-related reason for needing early access to their retirement funds. This means that you will need to be able to prove that COVID-19 has affected you personally

To qualify, at least one of the following must apply to you:

  • You have been diagnosed with COVID-19
  • You have a spouse or dependent who is diagnosed with COVID-19
  • You have experienced a layoff, furlough, reduction in work hours, or inability to work because of COVID-19 or lack of childcare due to COVID-19

Also note that not all retirement plans will accept these provisions because the CARES Act does not require employers to follow the relaxed distribution and loan rules. Therefore, you will need to check with your retirement plan sponsor to see if they are participating in this program.

Penalty for Early Withdrawals

The CARES Act permits qualified individuals to take an early distribution from certain retirement accounts. If you need to take out money from your retirement plan for reasons related to COVID-19, you are allowed to withdraw up to $100,000 during 2020 without triggering the usual 10% penalty for early distributions. Additionally, you are permitted to spread out any income taxes due over three years after the date when you withdrew the funds.

Required Minimum Distributions (RMDs)

Eligible individuals who have an individual retirement account or workplace retirement savings plan (such as a 401(k)) are not required to take a minimum distribution during 2020. In other words, these participants will not be forced to sell any investments that have lost value because of the Coronavirus epidemic.

Retirement Account Loans

The CARES Act also allows qualified individuals to borrow twice the normal amount (up to $100,000) from their workplace retirement plan. If you can prove that you have been affected by COVID-19, you will be able to take advantage of the provision that temporarily suspends the rule preventing employees from withdrawing over half of their retirement account balance. If you have already taken a loan and it's due before the end of 2020, you may be eligible to receive an extra year to repay it.