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CARES Act: 5 Important Impacts to Retirement Accounts

The CARES Act provided a massive stimulus to businesses and hopefully the economy when it was passed a week ago.  There is a myriad of opportunities provided for small and large businesses as well as individuals in the legislation.  For this newsletter we examine the 5 ways they’ll affect most of our clients – in their retirement accounts.

  1. 401(k) Loans:

Previously loan limits in 401(k) plans were limited to the lessor of 50% of the participant’s vested balance or $50,000.  For example, if you had a $75,000 vested balance you were limited to a $37,500 (50%) loan.  Not until you reached a $100,000 vested balance were you able to lend yourself the maximum amount of $50,000.  Under the new law a participant can borrow up to $100,000 from their 401(k) plan and up to 100% of their vested balance.  This means that some person from the above example could get access to the full value of $75,000 if needed.  Note this increase is available only if you’ve been “negatively affected by the coronavirus” but judging by what the legislation is including in this definition it seems the intention is for it to have broad application during this time.

  1. Introduction of the “Coronavirus-related distribution provision”:

This allows plan participants AND IRA owners who are under 59 ½ to distribute up to $100,000 and avoid the normal 10% penalty for an early withdrawal from their accounts.  Also, if you’re over 59 ½ the income you take from this distribution can be spread over 3 taxable years.  For instance, if you took that distribution this year the income, from a tax perspective, could be spread out between 2020, 2021 and 2022.  Careful planning is key here, especially if you will have a lower income year this year because of the coronavirus.  Additionally, the CARES Act allows you a 3-year period from the date you take a distribution to pay back the amount and recoup any taxes paid on those distributions when you do.

  1. RMD’s:

RMD’s are waived for 2020 – full stop!  In addition, people who have already taken their RMD for 2020 may elect to give them back if they desire.  An additional interesting note is that a person who turned 70 ½ in 2019 and waited until 2020 to take their first RMD, which by doing so would’ve required them to take two RMD’s in 2020, is waived from taking BOTH RMD’s and thus reduces income taxes even more

  1. Non-designated Beneficiaries of IRA’s:

This one’s bit wonky but stay with us.  Within the new legislation is language that ignores the year 2020 for the purposes of the five-year rule that pertains to Non-designated Beneficiaries who inherit a retirement account from decedents who pass away prior to reaching their Required Beginning Date.  In essence if you inherit a retirement account and aren’t that person’s spouse, you have an additional year to distribute the assets, giving you one extra year to spread out taxable income.

  1. Charitable Contributions:

Ok, this one isn’t about retirement accounts but it’s important none-the-less.  The CARES Act includes a new $300 “above the line” deduction for qualified charitable contributions for 2020 (and moving forward).  This means that even if you don’t itemize your deductions (which would mean charitable contributions wouldn’t be deducted from your taxes) you can still deduct up to $300 in chartable contributions moving forward.  This isn’t a huge number but does give a small benefit to being charitable if you’re able to do so.   Finally, the adjusted gross income limit for cash donations has been repealed.  This means that an individual, or couple filing jointly, can donate (and thus negate) up to 100% of their income, wiping out all of what would be their federal tax obligation.  Certainly not pertinent to most people but an interesting piece of legislation to pass!


As mentioned in the beginning of this post there are many other additional benefits the CARES Act provides to both individuals and businesses of different sizes.  If you have any questions about how you might be affected by, benefit from, or generally how to plan around what’s available to them please don’t hesitate to reach out either by phone or email.  We’re always here to walk you through it, and, if we’re not immediately available, our two new associates (pictured again below….) will be happy to read you a story until we can get back to you!


Be well everyone!


Your Team at iNNOVA Wealth Partners


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