Monday June 21, 2021
Updated COVID-19 Rules on IRA Loans and Rollovers
The Coronavirus Aid, Relief, and Economic Security (CARES) Act offered IRA owners several benefits designed to enable them to cope with the pandemic. The CARES Act included three specific provisions to assist IRA and other qualified retirement plan owners.
First, there is a waiver of required minimum distributions (RMDs) for 2020. The RMD waiver was created because IRA RMDs were calculated in December 2019 when assets were at record high values.
Second, an IRA owner impacted by COVID-19 may take a distribution up to $100,000. There is no 10% penalty tax for individuals under age 59½. The IRA owner may choose to re-contribute the distribution within three years with no penalty. Alternatively, he or she may choose not to recontribute the funds and pay the tax due in three equal amounts over years 2020, 2021 and 2022.
Third, an IRA owner may take a loan of up to $100,000 (the prior limit was $50,000). This loan must be taken between March 27 and September 22, 2020.
The IRS letter expands the potential group who qualify for the CARES Act qualified retirement plan benefits. A person who is infected with COVID–19 (or whose spouse or dependent is infected) may use the distribution or loan provisions. An individual may use the new IRA benefits if he or she (or a spouse or dependent) has experienced financial consequences because of COVID-19. The COVID-related adverse financial consequences may include being quarantined, furloughed or laid off, unable to work, unable to obtain childcare, experiencing reduced work hours or income or having a job offer or start date changed.
Because the CARES Act created an RMD holiday for year 2020, individuals are not required to take their IRA distribution. However, some individuals took an RMD distribution in January or February 2020. Because those individuals are past the normal 60-day period for a qualified IRA rollover, the IRS announced these IRA owners will be able to recontribute the RMD amount to their IRA by August 31, 2020. If an IRA owner took a distribution prior to the passage of the CARES Act and recontributes the full amount, there will be no taxable income for 2020.
Editor's Note: Congress and the IRS are making extensive efforts to reduce the financial impact of COVID–19. Because most individuals have an IRA or other retirement plan, the ability to take a distribution and recontribute the amount within three years or take a loan of up to $100,000 is a significant benefit.