IRS Expands Eligibility for Coronavirus-Related Distributions from Retirement Accounts | Lord Abbett
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Retirement Perspectives

The agency provides more details about distributions and added provisions to help investors affected by COVID-19.

Read time: 3 minutes


On June 19, the IRS released additional guidance about coronavirus-related distributions (CRDs) and loans that are included in the Coronavirus Aid, Relief, and Economic Security (CARES Act) via Notice 2020-50 “Guidance for Coronavirus-Related Distributions and Loans from Retirement Plans Under the CARES Act” that significantly expands eligibility. The agency also revealed some significant new provisions.

The CARES Act, coupled with guidance from the IRS, provides relief for owners and beneficiaries of retirement accounts in response to the COVID-19 pandemic. We’ve covered the key provisions in the CARES Act, including:

The CARES Act created a new retirement account distribution, coronavirus-related distributions (CRDs), for individuals affected by COVID-19. A “qualifying individual” can take a CRD anytime in 2020 up to $100,000 from their IRAs and/or company sponsored plan (i.e. 401(k), 403(b), etc.). The 10% early distribution penalty tax that would otherwise apply if you’re under age 59½ is waived. Furthermore, there’s an option to spread the federal tax liability (distribution is subject to income tax) ratably over a three-year period (2020-2022). Alternatively, all income can be included in your 2020 tax return (generally due April 25, 2021).  Finally, CRDs can be repaid (rolled over) over a three-year period (via a single rollover or through a series of partial rollovers) to either an IRA or employer sponsored plan. Repayment does not have to be made to the same IRA or employer sponsored retirement plan from which the funds were originally distributed.

Previously, CRDs were available to a “qualified individual” who certified that he/she:

  • Diagnosed with COVID-19
  • Spouse or dependent is diagnosed with COVID-19
  • Experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, reduction in hours, unable to work due to lack of child care due to COVID-19, forced to close or reduce hours of a business they own or operate due to COVID-19; or other factors, as determined by Secretary of the Treasury.

New IRS guidance issued on June 19 (Notice 2020-50) increases eligibility for CRDs, COVID-19 loans, and loan payment deferral by expanding the definition of a “qualified individual.”  This guidance significantly increases the number of individuals eligible for COVID distributions and loans to include those who:

  • Experience financial hardship as result of having a reduction in pay (or self-employment income) or having a job offer rescinded or start date for a job delayed due to COVID-19
  • Spouse or a member of the individual’s household being quarantined, furloughed, or laid off or having work hours reduced due to COVID-19; being unable to work due to lack of childcare due to COVID-19; having a reduction in pay due to COVID-19; or having a job offer rescinded or start date for a job delayed due to COVID-19; or
  • Closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19

Note: Generally, an individual is a member of a participant’s household if such individual shares the participant’s principal residence.

What else do I need to know?

There are a few miscellaneous items from the latest IRS guidance (2020-50):

  • There is no requirement to justify the amount of a CRD or loan. In other words, a “qualified individual” does not need to provide proof or “paper trail” certifying the appropriateness of the amount requested compared to the financial need.
  • A qualified individual can elect to include income from the CRD in 2020 or spread evenly over a three-year period (2020, 2021, and 2022.) However, once 2020 taxes are filed reflecting the income reporting, the choice is irrevocable. In other words, it cannot be changed at a later date.
  • CRDs can be taken from inherited accounts. However, they cannot be repaid by a beneficiary other than a spouse since a non-spouse beneficiary is ineligible to do a rollover.
  • If a person takes a CRD and spreads the income over three years but dies before all the tax is paid, then the remainder of the CRD not yet included in income must be included on the deceased’s final tax return.
  • A person taking a series of periodic payments (SEPP) under Section 72(t) (thereby avoiding 10% early distribution penalty tax) can take a CRD, and it will not be treated as a payment “modification.”
  • The IRS provided a model form for an employee to certify that she meets the conditions of an individual adversely affected by COVID-19.


If you have additional questions, please contact your Lord Abbett representative at 888-522-2388.

 

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

GLOSSARY

Traditional IRA contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies.

A Roth IRA is a tax-deferred and potentially tax-free savings plan available to all working individuals and their spouses who meet the IRS income requirements. Distributions, including accumulated earnings, may be made tax-free if the account has been held at least five years and the individual is at least 59½, or if any of the IRS exceptions apply. Contributions to a Roth IRA are not tax deductible, but withdrawals during retirement are generally tax-free.

401(k) is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on an aftertax and/or pretax basis. Employers offering a 401(k) plan may make matching or nonelective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

A defined contribution plan is a retirement plan that's typically tax-deferred, e.g. a 401(k), at employers. An employee contributes a percentage of his/her paycheck in an account to fund retirement. The sponsor company will generally match a portion of employee contributions.

A required minimum distribution (RMD) is the minimum amount an account owner must withdraw from a retirement account each year. An owner generally has to start taking withdrawals from a retirement plan account at age 72. Roth IRAs do not require withdrawals until after the death of the owner.

A Health Savings Account (HSA) is a savings account that lets employees set aside money on a pretax basis to pay for qualified medical expenses.

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