Borrowing From Your Retirement Plan: New CARES Act Rules

Borrowing From Your Retirement Plan: New CARES Act Rules

It’s been nearly half a year since Americans first became widely aware of the coronavirus contagion within the United States. While for a brief month it looked as if we had the virus in hand, since then it has spread wildly out of control in many areas. 

People who did not suffer dramatic financial consequences in the early stages of the pandemic could see some hard days ahead. For this reason, it’s a good idea to become familiar with the new relaxed rules associated with withdrawals from tax-advantaged retirement plans. 

In late March, Congress passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act). This bill offered provisions related to distributions from retirement accounts such as an IRA or 401(k). One of the key goals was to enable workers to make penalty-free withdrawals from a retirement plan to help sustain them while out of work due to the coronavirus. 

To be eligible to make penalty-free withdrawals, plan participants must meet one of the following criteria: 

  • The account owner, spouse or a dependent is diagnosed with COVID-19
  • The account owner experiences one of the following financial consequences due to the virus:
    • Furloughed
    • Laid-off
    • Work hours reduced or place of business closed (including for self-employed)
    • No access to childcare
    • Quarantined¬†

The Act stipulates that workers can self-certify that they meet at least one of the criteria. Be aware, however, that if it is later discovered that the account owner did not meet the criteria for a coronavirus-related distribution, he might be required to pay the early withdrawal penalty. 

Also note that while this penalty is waived for qualified workers, they must still pay income taxes on the amount withdrawn. However, there are a few ways to mitigate the income tax burden on those withdrawals. The first is through regular distribution. These are the parameters: 

  • You have up until Dec. 30, 2020, to make a distribution
  • The total aggregate limit is $100,000 from all plans and IRAs
  • The distribution waives the 20 percent income tax withholding requirement
  • Income taxes will be due when filing a 2020 tax return
  • Retirement account owners who no longer work for an employer are free to take a distribution
  • Current employees may take a distribution only if the employer plan allows for a hardship or in-service distribution (note that the CARES Act permits employers to amend plan documents to allow coronavirus-related distributions)¬†

While a retirement plan distribution does trigger income taxes for the tax year withdrawn, you can spread the tax burden out over three years. For example, let’s say you withdraw $18,000 this year. You may report the full amount as income on your 2020 tax return; or you can claim $6,000 a year on your 2020, 2021, and 2022 returns. This strategy reduces the chances of bumping your income into a higher tax bracket.

The second way is to pay the distributed amount back into your retirement plan. Initially, you will have to pay income taxes on the amount withdrawn. However, if you pay it back within three years, you can file to get the taxes you paid refunded. One caveat with this plan is that eligible retirement plans will treat repayment of this type of distribution as a rollover event for tax purposes. Be aware that if the retirement plan does not accept rollover contributions, it is not required to change its terms for this purpose. 

Your third option is to withdraw money as a loan if your employer permits loans from the retirement plan. This is another scenario in which you must repay that money within a specified time period. You do not have to pay income taxes on the loan, but you do have to pay interest on the amount borrowed. The good news is that the interest you pay also goes into your account. 

Under normal circumstances, retirement account loans are limited to $50,000 or 50 percent of the account balance, whichever is less. But for a coronavirus loan, you may borrow up to 100 percent of your vested balance or $100,000, whichever is less. You will need to repay that loan within the plan’s stated repayment period, although the CARES Act gives 2020 borrowers an additional year to repay this type of loan from an eligible retirement plan. Be aware though that you’ll owe both income taxes on the outstanding balance and the penalty for withdrawals made before age 59½ if you do not repay that loan in time. 

Note that these CARES Act provisions are available only for the first 180 days after the Act was passed, which was on March 27, 2020. As Congress debates new legislation to aid struggling Americans suffering from the pandemic, this provision could be extended.

Lost Inheritance: How to Find a Deceased Parent’s Assets

Lost Inheritance: How to Find a Deceased Parent’s Assets

If you have a relative who recently died and left you in charge of his or her finances, you are not alone. You probably have colleagues at work in the same boat. A neighbor or two (or 10) and even your millennial yoga teacher might very well be working through a quagmire of wills, probates and assets nobody can find. You are definitely not the only one. 

The internet has made it much easier to keep track of our checking, savings and investment accounts. But the elder generation generally missed out on the convenience of dashboard consolidation and app trackers. What most of them leave behind are file cabinets full of bank statements and old bills, bookshelves of file folders and prospectuses – perhaps once carefully catalogued. You may start rummaging through papers and not find anything more recent than five years ago. 

How do you wrap your hands around investments and assets you know your dad owned when you have no idea where they are? 

Bear in mind that when there is no activity in an account for a year or more, assets may be deemed dormant or abandoned. They could eventually become property of the domicile state through a process called escheat, so it is important that you do not wait too long before finding lost assets. 

Start at Home

If your parent used a computer, you should get access to his file folders and dig into his email account to see if he received any electronic communications from financial companies. If he wasn’t computer literate, then start with the mail. It may take six months to a year to get your hands on all of the paperwork, but if your relative did not sign up for electronic delivery then companies are required to send him statements through the U.S. mail. 

If no one continues to live at his home, the easiest way to do this is to notify the post office to route all of his mail to your address. To do this, you will need to complete a Forwarding Change of Address order at the post office and provide proof that you are authorized to manage the deceased’s mail. 

As you’re rummaging through Dad’s paperwork, here are some tips on what to do: 

  • Look for bills and check if those entities are holding a utility deposit;
  • Look for statements for bank accounts, bonds, stocks, mutual funds, CDs, dividend or payroll checks, life insurance policies and retirement accounts;
  • Look for any record of a safe deposit box, such as a bill for the rental or a key; if he has one it is most likely located at his bank branch;
  • Contact his past employers to ask if they have any record of pensions, retirement plans or employer-purchased life insurance for your parent.¬†

Once you get your hands on any statements, call the company or broker listed. You will need to send them certain documents to verify your parent is deceased (or a durable power of attorney document if he is incapacitated). Different firms and circumstances might have different requirements, but you’ll definitely need to send a copy of the death certificate. You may also be asked to provide a Court Letter of Appointment naming you as executor, a “stock power” of attorney that enables you to transfer ownership of stock, a state tax inheritance waiver, affidavit of domicile, trustee certification showing successor trustee, and/or a letter of authorization for joint accounts. 

You’ll need to call and provide these or similar documents for each institution where your parent holds assets. Don’t worry, these companies have trained staff to help guide you through the legal process of how to manage the assets of deceased account owners. 

Move to the Internet

Check unclaimed property lists at every state where your father lived. Get started at, a free website that allows you to search for unclaimed property held by each state. Also search at to conduct a national search. 

Go to the Pros

If you’re sure your relative had more assets than you’re able to find, consider hiring a forensic accountant. These professionals have the tools and expertise to find offshore accounts, shell companies and other types of financial accounting practices. For example, a forensic accountant may request an IRS transcript that reports past 1099-DIV and 1099-INT distributions. Note that banks are required to issue such forms for account activity involving $10 or more. 

You also may want to share your task with your own financial advisors. They might be able to recommend ways to help you track down, transfer and manage your parents’ assets, particularly if you need to set up income sources for another parent or relative. The point is, you don’t have to go it alone. This is a common problem and there are experts to help you work through it – but it will likely take time, patience and a lot of paperwork.

What Is Your Retirement Income Savings Mix?

According to a recent study by the Center for Retirement Research at Boston College, the following percentages represent how much the average American will need to rely on personal savings to provide income throughout retirement:

  • Low-income households: 25 percent
  • Middle-income households: 32 percent
  • High-income homes: 47 percent

These numbers reflect the contribution of Social Security income. For Americans with less income, government benefits account for a higher percentage of household income. Higher-net households, on the other hand, must contribute a larger share of their savings to maintain their pre-retirement standard of living. As a general rule, Social Security provides 30 percent to 40 percent of household income for the average retiree.

However, it’s important to recognize that each household is different. For example, single women fall into a much direr category. Social Security benefits tend to represent a higher share of household income for elderly unmarried women – 50 percent of whom rely on Social Security for 90 percent or more of their income.

Note, too, that the average elderly unmarried woman does not spend the majority of her adult life as single. Many outlive their husband and subsequently become more dependent on entitlement benefits, especially if much of the family wealth was spent on medical treatment and long-term care for the husband before he died.

Clearly, there are many factors that lead women down a path to impoverished retirement. These include lower pay than men throughout their careers, time off from the workforce to raise children and/or provide care to elderly relatives, not to mention the fact that women tend to live longer than men. There are also other factors that contribute to eventual poverty, such as divorce, loss of spouse or being forced to retire due to poor health.

However, women aren’t the only ones at a disadvantage when it comes to saving for retirement. Low-income workers – including people who clean houses, drive school buses and maintain the lawns of higher income families – have difficulty just making ends meet, let alone saving for retirement. Consider that someone making $7.25 an hour, 40 hours a week for 52 weeks a year earns only $15,080 a year before taxes.

Retiree income generally consists of several different resources, such as a pension, investments and personal savings. However, with fewer employer-sponsored pension plans offered, a greater burden is placed on individual savings and investments. There are two problems with these income sources. First, the current savings rate in America averages 5.5 percent of income, a significant drop from the average 11.9 percent personal savings rate of 50 years ago. Moreover, persistent low interest rates have curbed yields from traditional savings accounts.

Second, IRAs, company 401(k) plans and individual investment portfolios are subject to the volatility of the stock and bond markets. While these securities tend to grow substantially more than bank savings vehicles over a long period, people who have had to curtail investment contributions due to wage stagnation might have missed out on gains from the long-running bull market.

Since so much retirement income must now come from savings, pre-retirees and retirees are looking for ways to maximize their assets. One strategy is to simply work longer in order to save more money and allow investments more time to grow. Recent statistics show that there are more than 35 million Americans age 55 and older in today’s workforce, compared to just below 16 million in the same age range 20 years ago.

Retirees seeking ways to maximize retirement income sources might want to consider maintaining a prudent annual withdrawal rate from their investments, laddering a bond portfolio or purchasing an annuity with some of their savings to generate guaranteed income to last throughout retirement.

Bear in mind that each of these strategies has advantages and drawbacks that can affect a retiree’s long-term financial security. It’s important to work with an experienced financial advisor to tailor a retirement income strategy based on unique financial circumstances.

Got Foreign Assets? FBAR May Apply to You

Are you aware of the nature of all your investments, domestic and international? Do you know if you have foreign accounts with an aggregate value higher than $10,000 at any time during the calendar year, U.S. taxpayers (including individuals and business entities) are required to report on foreign assets or investments they hold in offshore accounts? Under the Bank Secrecy Act, you may be required to e-file what is known as the FBAR directly with the Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department. Given the diversity of assets that many people hold, we advise against assuming that the FBAR rules don’t apply to you.  If you’re not sure, we can help you determine the answers.     

As is often the case with tax laws, there are some exceptions and intricacies to the FBAR rules, so be sure to contact our office for more details. We can help you understand whether the rules apply to you and what you need to do to comply with them.