The CARES Act: Economic Relief from Covid-19, PLUS a Unique Opportunity to Tap Into Your 401(k) Plan

The Coronavirus Aid, Relief and Economic Security Act “CARES Act” was enacted to provide financial flexibility to those impacted by Covid-19. The CARES Act includes stimulus checks to individuals, small business loans, and several adjustments to retirement plan rules which allows for easier access to those funds. I will share what those retirement plan changes are, and importantly discuss a unique opportunity that may allow you to transfer funds currently in your 401(k) to an IRA, which you can then use for self-directed investing.

First, a question. Do you have funds in a 401(k) with your current employer, and wish you had more investment options? Like most employees, somewhere in your retirement savings journey you probably discovered your 401(k) is limited to the funds selected by your employer. That is, until you sever employment. The vast majority of 401(k) plans offer a limited menu of investment options, often to limit liability for the employer. Very few allow you to invest in real estate or private equity.

If this is striking a chord, I have good news! The CARES Act may provide an opportunity to move some or all of your 401(k) funds into an IRA, an IRA that opens up the possibility of investing in alternative assets like real estate, precious metals, or private equity.

However, and before you get too excited, this opportunity will not apply to everyone. While the CARES Act is the law of the land, restrictions
apply, and I would encourage you to seek expert advice to determine if you qualify.

So how does it work?

First and foremost, this will only apply to individuals impacted by the Corona virus. This could include people who were diagnosed with Covid19, are caring for a spouse or dependent diagnosed with Covid-19, were laid off or furloughed from work, or impacted financially as a result of Covid-19. If this applies to you, listen up.

The Cares Act allows individuals to distribute up to $100,000 from a qualified retirement plan, including 401(k)s, 403b’s, and TSP’s. The IRS will waive the 10% early withdrawal penalty for those younger than 59.5, AND they are offering a 3-year window to re-contribute the funds, so NO TAX is due. This final piece represents what could be your tax-free transfer to a self-directed IRA. Specifically, if the distributed funds are “re-contributed” to another qualified retirement plan within 3 years, there is no tax, and the funds can leave the 401k permanently to open up more investment options. Retirement funds that were previously locked up can now be made available for alternative investing as a result of this new legislation. This is especially useful for individuals wanting to diversify their retirement outside of publicly traded securities.

Here are some additional features of the CARES Act:

Required minimum distributions (RMD’s) are waived for 2020 – Someone who would normally be required to take RMD’s can forego the distribution in 2020 if they choose to. Normally people aged 72, and people with inherited IRA’s must take annual RMD’s

10% penalty on early distributions for Covid-19 are waived – Taking a retirement plan distribution before the age of 59.5 would generally incur a 10% early withdrawal penalty

Take a distribution of up to $100,000 for Covid-19 related reasons - As mentioned above, if you’ve been impacted by Covid-19 the IRS is allowing you to take a distribution from your retirement plan, and is
allowing the following flexibility:

You can recontribute the distributed amount into another qualified retirement plan over the next 3 years and there is no tax on the
distribution if you do this.

Alternatively, you can pay the applicable tax owed on the distribution over 3 years as opposed to the normal 1 year.

401(k) loan provision doubled – 401(k)s uniquely allow account holders to borrow money from and eventually repay their accounts. 401(k) holders may now borrow up to $100,000 under the CARES Act, which is double the standard limit of $50,000.

The Cares Act will be in place until December 31, 2020 so be sure to evaluate your options and act well before year end if any of the changes outlined above could help you. I strongly encourage you to seek guidance before acting on any of the provisions mentioned in this article, but the CARES Act certainly creates some unique opportunities that may benefit you. Feel free to contact New Direction Trust Company should have any questions about the new legislation.