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Retirement Perspectives

Retirement investors get some relief in the government’s stimulus bill to help alleviate financial strains from the coronavirus.

The first quarter of 2020 has been a wild ride for individuals who own an individual retirement account (IRA) and/or workplace retirement plan (i.e. 401(k)). First came the surprise passing of the Setting Every Community Up For Retirement Enhancement (SECURE) Act in late 2019, followed by delaying the deadline for funding IRA and Health Savings Accounts (HSAs) for tax year 2019. Then, on March 27th, President Trump signed into law a massive stimulus bill in response COVID-19 that included a grab bag of IRA, HSA, and employer plan provisions.

The Coronavirus, Aid, Relief and Economic Security (CARES) Act earmarks more than $2 trillion to individuals and businesses and provides other financial assistance as compensation for the havoc the virus has caused. In addition, the massive stimulus package makes several changes to retirement accounts/plans, offering investor’s access to funds that otherwise would not be available. The legislation also includes deferral of federal student loan payments, and provides the Department of Labor with expanded authority to postpone certain deadlines under the Employee Retirement Income Security Act (ERISA).

This column will cover the retirement planning provisions included in the CARES Act, plus IRS Notice-2020-18 that extended the deadline for filing federal income tax returns—as well as funding 2019 traditional and Roth IRA and HSAs—from April 15 to July 15.

Coronavirus-related Distributions
The bill waives the 72(t) 10% early distribution penalty tax for “coronavirus-related distributions” (CRD) made any time in 2020 that would otherwise apply to most distributions made before turning age 59½. Thus, “qualifying individuals” can withdraw up to $100,000 for a CRD from an IRA as well as employer workplace plans including 401(k), 403(b), and governmental 457(b) plans.

Notably, withdrawals would still be subject to taxation, however a qualifying individual would have the option to pay the income tax due (spread evenly) over three years, rather than all in the year of distribution. Moreover, previously distributed amounts can be repaid (“recontributed”) to a qualified plan or an IRA over the next three years (not adjusted for earnings); not subject to the annual plan contribution limit.

Additionally, beginning on the day after an individual receives a CRD, repayment can be made via a single rollover, or multiple rollovers so long as it’s made during the allotted three-year time frame (2020, 2021, and 2022). Finally, we anticipate, for distributions that are repaid, an amended tax return will need to be filed to claim a tax refund.

Qualifying individuals need to meet any of the following:

  • 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, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19;
  • Other factors as determined by the Treasury Secretary.

Employers can rely on a participant’s self-certification that they meet the requirements of a CRD.

Plan Loans
The legislation increases plan loan limits to qualified individuals (see above; same requirements as a CRD) to the lesser of: $100,000 or 100% of the participant’s vested account balance. Currently, plan loans are limited to the lesser of $50,000, reduced by other outstanding loans, or 50% of a plan participant’s account balance. A qualifying loan applies to loans taken within 180 days of the enactment (March 27, 2020) of the bill.

Furthermore, individuals with a plan loan with a repayment due from the date of enactment of the act through Dec. 31, 2020, can delay their loan repayment(s) for up to one year. 

Plan sponsors are not required to adopt the CRD or increased plan provision—it’s optional.

Plan Amendments
The legislation further permits retirement plans to adopt the aforementioned provisions immediately, even if the plan does not currently allow for hardship distributions or loans, provided the plan is amended on or before the last day of the first plan year beginning on or after Jan. 1, 2022. For governmental retirement plans, the amendment deadline is delayed two years until 2024.

Waiver of 2020 Required Minimum Distributions (RMDs)
RMDs from defined contribution plans (DC) and IRAs (excluding Roth IRAs) are calculated based on an individual’s prior-year December 31 account balance. Therefore, the waiver will come as a relief to the many retirees who otherwise would be required to take an increasingly high RMD for 2020, assuming his/her account balance has significantly declined since the beginning of the year. In other words, an individual would base their 2020 minimum distribution on their account balances as of Dec. 31, 2019, when almost certainly their accounts were significantly higher than they are today.

The CARES Act waives RMDs for calendar year 2020 for IRAs and DC plans, including 401(k), 403(b), and 457(b) plans. The waiver does not apply to defined benefit plans. Under new SECURE Act rules, retirees generally upon reaching age 72 must take an RMD from their DC plans and IRAs.

Notably, the waiver also applies to RMDs that must be made by April 1, 2020 (if not previously made in 2019). In other words, account owners who turned 70½ in 2019 and deferred taking required distributions in 2019 and instead elected to delay their first distribution until April 1, 2020 don’t have to take that withdrawal, even though it counts toward their 2019 RMD. For example, a retiree who attained age 70½ in 2019, but decided to delay their 2019 RMD normally would have been required to take a distribution by April 1st, 2020, as well as a second RMD for 2020 by the end of 2020, but now does not have to take a 2019 or 2020 RMD. As the saying goes, “it pays to wait.”

What about inherited accounts?
Designated beneficiaries who inherited certain retirement accounts (401(k)s, IRAs, etc.) also benefit from the waiver—their minimum 2020 distributions are suspended.

In addition, for purposes of the post-death payout “five-year rule” (that applies to non-designated beneficiaries), where the owner died before their required begin date; 2020 is not counted.

What about the new 10-year post-death payout rule imposed by the SECURE Act?
The new 10-year payout rule that applies to non-eligible designated beneficiaries is not impacted by the CARES act provision that waives RMDs for 2020. Why? 2020 is the first year that non-eligible designated beneficiaries could inherit a retirement account (IRA, 401(k)) and thus be subject to the 10-year rule. However, the 10-year payout doesn’t start until the year after the year of death. Therefore, 2020 doesn’t count as year one in regards to the 10-years payout. Instead, 2021 counts as year one.

Expanded Health Savings Accounts distributions
The CARES Act expands the definition of qualified medical expenses to include over-the-counter items for the purpose of taking a qualified distribution from an HSA and Flexible Spending Account (FSA). In addition, telehealth and other remote care services can be covered pre-deductible without violating federal rules for high deductible health plans paired with an HSA (permitted for plan years that begin on or before 12/31/2021).

IRS extends traditional IRA/Roth IRA 2019 contribution deadline
Separate and apart from the CARES Act, the IRS extended the 2019 traditional/Roth IRA and HSA contribution deadline to July 15th (from April 15). The IRS issued FAQs about this and other useful information.

Advisors, 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 OF TERMS

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.

A SIMPLE IRA plan is an IRA-based plan that gives small-business employers a simplified method to make contributions toward their employees’ retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or nonelective contributions. All contributions are made directly to an individual retirement account (IRA) set up for each employee (a SIMPLE IRA). SIMPLE IRA plans are maintained on a calendar-year basis.

A simplified employee pension plan (SEP IRA) is a retirement plan specifically designed for self-employed people and small-business owners. When establishing a SEP IRA plan for your business, you and any eligible employees establish your own separate SEP IRA; employer contributions are then made into each eligible employee’s SEP IRA.

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 70½. Roth IRAs do not require withdrawals until after the death of the owner.

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