The Coronavirus Aid, Relief, and Economic Security Act (CARES) Act has passed both houses of Congress and on Friday was signed by President Donald Trump, codifying the historic measure into law which is aimed at providing relief to American workers and businesses affected by the COVID-19 coronavirus pandemic. The law also contains several key provisions for people at or near retirement, relaxing some of the rules in place that govern the tapping of retirement savings.
Several provisions target different kinds of relief that those at or near retirement will be faced with, according to Mark Miller, financial columnist for Reuters.
One of the provisions of the new bill allows a retiree to be able to take a coronavirus-related distribution of up to $100,000 from a retirement plan or IRA without the normally-included 10% early withdrawal penalty if they are under the age of 60, while the bill also reportedly relaxes rules around retirement plan loans, allowing you to borrow up to double the previously-allowed amount – a maximum of $100,000 – from a 401K plan.
In terms of the doubling of the current borrowing limit, Miller sees this as a positive development for retirees.
“This is a reasonable way to provide liquidity to households during the crisis, but it is not risk-free,” Miller says. “Loans are tax-free unless you fail to repay – any remaining balance is taxed as ordinary income, and a 10% penalty is due for those under age 59-1/2 for taking an early distribution. Since you are borrowing from yourself, no harm, no foul – we hope.”
The law also waives the requirement for borrowers to take required minimum distributions (RMDs) for the remainder of 2020, which will allow those in or near retirement to stretch their savings further while the economy mounts its recovery once the worst of the coronavirus crisis is past. This is also a generally good development, Miller says, since savings are likely to play an important role for weathering this economic turmoil.
“[Required minimum distributions] this year are based on the value of your holdings as of Dec. 31 last year – when the market was much higher,” Miller says. “Allowing retirees to retain a bit more of their savings makes sense right now.”
However, the impact of this provision may not be as widespread as one may think, according to Ed Slott, an expert and author on retirement saving.
“It’s a good provision, but it’s not as helpful as you might think – the government’s own data indicates that 80% of people subject to RMDs take more than the minimum anyway, because they need the money,” Slott tells Miller. “So I guess this will help people who don’t need the help.”
Read the column at Reuters.