Financial Fingerprint: How to Approach Your Retirement Questions presented by William D. Connor, Financial Advisor at Meld Financial.
DEFENSE WINS RETIREMENT™: How to Shift Your Strategy From Growth to Income presented by Kyle Whittington, CFP®, President at Meld Financial. The webinar will be held on August 24th at 3:00 PM Central Time. There is no cost to attend, but you must register in advance.
Using the rollover rules for retirement plans as a short-term loan has typically been a last resort for those needing cash in tough times. The rules are strict, and failure to abide by such rules can result in huge penalties. However, with the implementation of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the IRS has provided some additional flexibility with rollovers in hopes of reducing the economic stress caused by COVID-19.
Rollover Rules Before the CARES Act
Rollovers take three forms as outlined by the IRS. They are direct rollovers to another qualified retirement plan, trustee-to-trustee transfer, and the 60-day rollover. The 60-day rollover rule was most impacted by the CARES act, and those details are the focus of this article. A simple example of when a 60-day rollover is appropriate is when someone switches jobs and transfers assets from their old 401(k) to a new retirement account.
Before the CARES act, distributions directly taken from a retirement plan could be rolled over into another qualified plan within 60 days without penalty. This could be used as an emergency loan in some cases when used properly. It is also important to note that required minimum distributions (RMD’s) were not able to be rolled over.
CARES Act Make Rollover Rules More Lenient
In response to the coronavirus pandemic, Congress wanted to give savers more flexibility to protect both their present and future financial security. With rollovers being a typical last-ditch effort for quick short-term cash, it is no surprise that the IRS has loosened their governing rules.
Coronavirus Related Distributions [CRD] are not taxed as early withdrawals.
Individuals experiencing significant hardship in response to COVID-19 will have early withdrawal fees waived for distributions from qualified retirement plans. Those distributions can be up to $100,000 total and can be repaid up to three years after the distribution date. Repayment within the 3-year window is treated as a rollover and will also waive traditional income taxes typically associated with distributions.
RMD’s can be rolled over.
With the implementation of the CARES act, RMD’s taken in 2020 can be rolled over into another retirement account just as any other distribution. This new rule applies to RMD’s whose 60-day window expires after April 1st, and the new rollover window extends all the way to August 31st. While CRD’s are in place to protect those who are experiencing very rough times, the new RMD rules allow others to protect their savings and avoid withdrawing from their retirement while the market is down.
Eligible Rollover Distribution Rules Dislocation
Retirement plan distributions deemed “eligible rollover distributions” require a plan administrator to provide a notice with the rules of a rollover, comply with participant instructions, and withhold from the distribution for taxes if it is not rolled over. Distributions that are not classified as such, like RMD’s in previous years, do not require the presentation of a notice nor compliance to participant instructions.
While there are no RMD’s in 2020, any distribution that would have been an RMD does not need to be treated as an eligible rollover distribution. This may be a cause for confusion, but if a distribution was once for a 2020 RMD and is now eligible for rollover, the participant must perform the rollover themselves and has either 60-days or until August 31st to complete it.
Meld Financial and Meld University are your source for retirement plan information.
As the economic situation related to COVID-19 unfolds, there may be even more changes or extensions to retirement plan rules. Regardless of whether you are an account holder or a beneficiary, it is important to know the important dates and minimums so you can plan effectively. For even more information on retirement planning, visit Meld University. At Meld U, we provide articles, webinars and in-person classes on financial matters to the public at no cost.
Further, working with a qualified team of financial professionals can help to alleviate the stresses related to retirement planning. If you’re looking for help saving and planning for your retirement, contact a member of our team at Meld Financial. Our team of wealth managers consists of financial, legal and tax professionals who will help you develop your Financial Fingerprint™, our proprietary system that guides your retirement plan.