How the CARES Act could help you
How the CARES Act could help you
Act includes two new provisions available through retirement plans
In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020. This landmark bill contains numerous provisions affecting large corporations and small businesses alike, state and local governments, and individual workers. The Act includes two new provisions that your employer may make available, through the retirement plan, to help alleviate financial strain due to COVID-19. If your employer elects to implement these provisions, they will impact the loans and distributions available to you through the retirement plan benefit.
Loan Limits Increased
Available until September 23, 2020, retirement plan loan limits loan limits have increased. You may now request up to $100,000 or 100% of your account balance, whichever is less. In addition, the loan repayments can be delayed for up to one year.
If you are currently making payments to existing loans outstanding between March 27, 2020, and December 31, 2020, those payments can be postponed for one year. The due date will be extended by one year and interest will continue to accrue even though you are not making payments.
Coronavirus Related Distribution (CRD)
A second option, available until December 30, 2020, is a distribution of up to $100,000. With this distribution, you will owe income taxes on any pretax dollars withdrawn, however, you will not pay the customary 10% early withdrawal penalty, which usually applies to those under age 59 ½.
Instead of owing income taxes in the year of the distribution, this withdrawal will be taxed over three years unless you elect otherwise. You also have the ability to repay the withdrawal over a three-year period.
Some Things to Keep In Mind
While both of these options may help alleviate immediate financial needs, they represent a significant drain on your retirement savings. For example, $100,000 withdrawn today could cost a 45 year old more than $286,000 in compounded savings by the time she turned 65, assuming a seven percent average annual rate of return.*
If your employer makes these options available, and you elect to move forward, please note that to qualify for either provision, you will need to certify that you or your spouse/dependent(s) has been diagnosed with COVID-19 or experienced adverse financial consequences as the result of work closure, furlough, school closure, etc. You may be required to contact your retirement plan’s recordkeeper for more information.
Financial decisions of this magnitude should not be taken lightly. There are a number of other options to explore before utilizing the new loan provisions or CRDs. Make sure you’re getting the help you need from financial professionals you can trust. Reach out to the Money Advisors from Francis Investment Counsel’s MoneyAdvice@Work® Team.
*Past performance is no guarantee of future results. The example provided is a hypothetical scenario which may not actually occur in the future. Francis Investment Counsel does not provide legal or tax advice. While the information presented is from sources believed reliable, we cannot guarantee its accuracy or completeness.