Like graduate students, certain foster care providers also receive payments that are not taxable income and, as a result, may not have been able to make IRA contributions unless they have compensation from other sources.
Under the SECURE Act, these “difficulty of care” payments may increase the amount of nondeductible IRA contributions they can make (but not above the annual statutory limit).
Two CARES Act provisions are designed to help Americans affected by the COVID-19 pandemic to both access retirement funds in cases of financial hardship and preserve retirement income by deferring RMDs and allowing repayments of CRDs:
1. Waiver of 2020 RMDs. The CARES Act waives 2020 RMDs from traditional IRAs, simplified employee pension (SEP) IRAs, and SIMPLE IRAs. IRA owners, including beneficiaries, will not be required to take a 2020 RMD from their IRAs or inherited IRAs.
The RMD waiver also applies to IRA owners who reached age 70½ in 2019 but did not take their RMD before Jan. 1, 2020. This means that IRA owners who reached age 70½ and chose to delay their payment until April 1, 2020, will not have to take their 2019 or 2020 RMD.
RMDs are not eligible for rollover. However, IRA owners who took a distribution in 2020—before the CARES Act was passed—may be able to roll over the distribution, but only if it is within 60 days of receipt of the distribution and all of the other rollover requirements are met.
In addition, for IRA beneficiaries, 2020 is disregarded for purposes of the “five-year” rule for beneficiary distributions when IRA owners died before their required beginning date. Instead, one year is added to the five-year period.
For example, if an IRA owner died in 2018, the assets in the inherited IRA must now be distributed by Dec. 31, 2024, instead of by Dec. 31, 2023.
It’s important to note that the new “10 year” rule for noneligible designated beneficiaries under the SECURE Act is not affected by this CARES Act provision. The “10 year” period applies only to certain beneficiaries for deaths in 2020 or later years.
If an IRA owner dies in 2020, the “10 year” period would not start until 2021, the year after the year of the IRA owner’s death.
2. Penalty-free withdrawal exception for CRDs. The CARES Act creates a penalty-free withdrawal exception for coronavirus-related distributions (CRDs). The provision allows IRA owners to withdraw up to $100,000 in aggregate from IRAs and qualified retirement plans (e.g., a 401(k) plan, 403(b) plan, governmental 457(b) plan)—without paying the 10% early distribution penalty tax (if applicable)—and repay those amounts to an IRA or eligible retirement plan.
A CRD is a distribution made on or after Jan. 1, 2020, and before Dec. 31, 2020, to a qualified individual. A qualified individual is:
Someone (or the spouse or dependent of that person) who is diagnosed with COVID-19 or the SARS-CoV-2 virus in an approved test, or
A person who experiences adverse financial consequences as a result of being quarantined.
This can include being furloughed, laid off, or having work hours reduced due for a variety of factors determined by the Treasury secretary, including lack of child care or the closing or reduced hours of a business.
CRDs, while penalty-free, are still taxable to the IRA owner. But they are taxed ratably over a three-year period—rather than in the year of distribution—unless the IRA owner elects otherwise.
To help preserve retirement income, IRA owners may repay CRDs over a three-year period, beginning with the day following the day the CRD is made to an IRA or eligible retirement plan.
Repayments may be made in single or multiple contributions, and if made within the three-year period will be treated as satisfying the 60-day rollover requirement.
Extended 2019 tax-filing & IRA contribution deadline
Separate from the SECURE and CARES Acts, the IRS also extended the deadline to make 2019 IRA contributions.
IRS Notice 2020-18, issued March 20, 2020, extended the 2019 tax-filing deadline from April 15, 2020, to July 15, 2020, but did not address the IRA contribution deadline.
The IRS subsequently updated the frequently asked questions on its website to confirm that the deadline for making IRA contributions also has been extended by three-months, from April 15, 2020, to July 15, 2020.
The SECURE Act and CARES Act have brought major changes to IRAs, and more changes are likely, especially in light of the coronavirus pandemic.
It is too soon to tell when the pandemic will be under control. Stay tuned.
Credit Union Magazine’s Spring 2023 issue features the 2023 Credit Union Heroes and examines CUNA-League advocacy priorities, board leadership, the impact of financial well-being efforts, fee-related compliance issues, predictions for the year ahead, and more.
