New Retirement “Loopholes” Caused by COVID-19

I’m sure you’re being overwhelmed with information right now – not to mention all types of lifestyle changes – due to the ongoing COVID-19 outbreak.

Rather than add to that stress, I want to continue delivering articles that are focused on ways to approach life during this hectic time… insights about the highly-volatile investment markets… and especially specific actions you can take to better your personal situation today and in the future.

Just as an example, the new CARES Act has created several substantial changes to the retirement landscape that you should be considering.

Let’s start with emergency withdrawals from 401(k) and IRA accounts.

Before the law was finalized, I argued that Congress should make such withdrawals unlimited and free from both penalties and income taxes.

While the CARES Act didn’t go that far, it does allow Americans under retirement age to withdraw as much as $100,000 from their accounts without paying the usual 10% penalty and provides some additional tax relief.

How Does the CARES Act Work?

First off, any withdrawal has to happen this year — between January 1st, 2020 and December 31st, 2020.

You must also certify that your financial life was disrupted by COVID-19 in some way.

You have the option of paying the money back at any point over the next three years, including rolling it into a different retirement account than the original one (as long as the beneficiary is the same), and having the IRS treat it as a qualified rollover.

If you decide to keep the money outside of a retirement account, you can claim the distribution in equal amounts over the next three tax years (beginning with 2020). Alternatively, you can claim the entire distribution for 2020 if you so desire.

When looked at all together, this deal provides a lot of extra financial flexibility.

It will be interesting to see if individual states decide to honor the federal tax treatment or enact rules of their own.

And based on the wording, it appears as though spouses can each take advantage of the provision as long as they have individual retirement accounts in their own names.

Whether taking advantage of this special withdrawal window makes sense will depend entirely on your own personal circumstances and a list of factors way too long to analyze here.

That said…

Here Are My General Guidelines  

If you need the money urgently – to save a business or get your family through a possible rough patch, for example – then it’s a pretty easy decision to make.

Meanwhile, if you have reason to believe your tax situation might be more advantageous right now than it will be down the line, taking advantage of this penalty reprieve could make sense. It will also depend on your expected rate of return inside the account, the number of years left for the account to grow tax-deferred, and other factors.

The same is true if you have a possible investment opportunity that is only available outside the confines of a 401(k) or IRA … maybe even one becoming available because of this ongoing crisis.

Retirement plan loan limits have also been temporarily raised from $50,000 to $100,000 (or 100% of the vested account value). Again, as long as the loans are related to the coronavirus.

For anyone who has an existing loan from their retirement account, payments due from the effective date of the CARES act through December 31st can be delayed for one year without penalty. Interest will still accrue and repayment rates can be adjusted to account for the gap of non-payment.

Separately, if you’re already retirement age, the CARES Act also exempts you from having to take a required minimum distribution (RMD) for 2020.

That’s good news for anyone who might be heavily invested in the markets right now because it means there’s no need to liquidate underwater positions.

Meanwhile, what if you’re looking to contribute MORE money to a qualified retirement account?

The CARES Act also provides a little extra opportunity there – not in raw dollar terms but in time.

Since the deadline for filing 2019 income taxes is now July 15th, the IRS has set that same date as the deadline for making 2019 contributions to IRAs, Coverdell Accounts, Solo 401(k)s and other similar accounts.

That gives Americans several more months to let the current situation play out before they have to make a final decision on how much – if anything – they want to sock away. It also gives a lot more time for any potential tax refund or even a stimulus check to be used toward 2019 tax year retirement savings.

There is obviously a lot more in the CARES Act than what I covered here today.

But for most people, these are the most meaningful and applicable retirement-focused provisions … and when you step back and think about them a bit more, you’ll realize how significant they actually are.

To a richer life,

Nilus Mattive

Nilus Mattive

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Nilus Mattive

Nilus is the editor for the daily e-letter The Rich Life Roadmap and a Paradigm Press analyst.

Nilus began his professional career at Jono Steinberg’s Individual Investor Group, where he published his original research through a regular investment column. Later, he worked for a private equity business and spent five years editing Standard and Poor’s...

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