Change seems to be the name of the game in 2020 and retirement planning options for your 401k are no exception. With so much in flux since the passage of the $2 trillion CARES Act at the end of March, many of our clients are wondering what has changed and how it will affect their current plans.
In an effort to keep you informed and making the best decisions with your 401k, we’ve broken the topic down into four main areas of concern:
2) Loans and 2020 Repayment Extensions
3) Required Minimum Distribution (RMD) Suspensions
4) Funding Deadline for Cash Benefit and Cash Balance Plans
401k plan participants directly affected by the Coronavirus are eligible to take up to a $100,000 qualified distribution during the 2020 calendar year without incurring the usual 10% early withdrawal penalty fee. In order to qualify, participants must have tested positive for COVID-19, have a spouse or dependent who tested positive, or experienced financial hardship as a result of quarantine, furlough, reduced hours at work, loss of daycare, or the like. The distribution is effective retroactively to January 1, 2020, as well.
From a tax-planning perspective, these distributions are not accompanied by the typical 20% mandatory tax withholding and the tax liability of the distribution can be spread out over 3 tax years. Of course, you can always rollback or rollover your distribution into the plan or another IRA at a later date.
If you are considering taking money out of your 401k, you should first speak with your plan advisor. They will help you determine if using your retirement savings is the best course of action at this time.
LOANS AND 2020 REPAYMENT EXTENSIONS
Another way to utilize your 401K savings to help ease any temporary financial strain is to take out a loan against the assets in your account. Through 9/23/2020 (six months after the passage of the law), the loan maximum has been increased to the lesser of $100,000 or 100% of a participant’s vested balance. But just as you must do for the coronavirus-related distributions, you will have to certify that your need has resulted from the pandemic.
Furthermore, any payments that are due between March 27, 2020 and December 31, 2020 can be postponed up to one year. Even though interest will continue to accrue on these loans as you defer payment, you will not incur any further penalties for extending the due date.
REQUIRED MINIMUM DISTRIBUTION (RMD) SUSPENSIONS
Plan participants who have reached the age of RMDs can now forestall taking payments until 2021. Any RMD scheduled from a 401k, 403b, or profit-sharing plan during the 2020 calendar year is waived. Any RMDS already taken in 2020 can be rolled over into an IRA or back into the original plan if desired. Note that (1) non-owner, active employees generally do not qualify for this relief regardless of their age, and (2) this option is not available for those with a Defined Benefit or Cash Balance plans. Eligible participants interested in taking advantage of either of these options should contact us as soon as possible so we can adjust your schedule and make the required changes for 2020.
The deadline to make contributions to Defined Benefit and Cash Balance Plans has been extended from September 15th, 2020 until January 1, 2021. This gives individuals currently in need of their allocated savings extra time to meet their maximum contribution for the 2019 tax year. Deposits will still need to be made before 2019 taxes are filed, though, to qualify as deductions.
YOUR EMPLOYEE STATUS AND HOW IT COULD AFFECT YOUR ELIGIBILITY
Even if you have a plan that qualifies for one or more of the above relief options, be aware that your employment status could hinder or even disqualify you from participating. Active employees, terminated employees, furloughed employees, and those working reduced hours may all be subject to different stipulations regarding the above. For example, terminated employees generally do not qualify for 401k loans, but can request distributions from their retirement plans without the need for special options. Consult with your 401k plan manager right away if you have questions.
At RiversEdge Advisors, we know that retirement rules can be difficult enough to navigate without having to account for temporary, pandemic-related changes to legislation. But, we are dedicated to staying on top of each and every update for your benefit. Whether you are a plan sponsor or plan participant, we are here to help you make the best decisions with your money when you need them most.
Should you have any questions or concerns, or would like to take advantage of any of the above relief options, please contact us right away so we can make the necessary adjustments to your plan.
If you are a plan sponsor and are unsure how to navigate these changes with your employees, we’d be happy to meet virtually to discuss your next steps.