The CARES Act – Benefits for US Retirement Accounts & Student Loans
The COVID-19 crisis is affecting individuals on a global scale, with governments across the world responding in myriad ways. In the US, the federal government has enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).
The act contains several provisions that reduce the negative financial impact of COVID-19 through changes to retirement account rules and student loan repayments. This blog provides an overview of four of these changes and discusses which individuals can benefit from them, including US persons living in Canada.
Four Important CARES Act Changes
- Required Minimum Distributions
Required minimum distributions for 2020 are now being waived on employer-sponsored retirement plans and IRAs. Individuals can continue to receive distributions as needed.
- Coronavirus-related Distributions
Up to $100,000 in coronavirus-related distributions (“CRDs”) from certain retirement accounts will have the 10% early withdrawal penalty waived. To qualify, the individual or their spouse must be diagnosed with COVID-19 or experiencing adverse financial consequences due to COVID-19.
The mandatory 20% withholding tax that applied on certain qualified accounts is also being waived. In addition, CRDs are prorated into an individual’s taxable income over a three-year period. If reinvested into a qualifying retirement plan, the CRD is treated as a rollover and will not be taxable.
- Retirement Account Loans
Qualifying retirement account loan limits have been doubled from the lesser of $50,000 or 50% of the plan balance to $100,000 or 100% of the plan balance. These loans must be paid back within five years. In addition, existing borrowers who have a repayment due between March 27, 2020 and December 31, 2020 can delay their loan repayments for up to one year. However, the interest will continue to accrue on the loan. An IRA is not considered a qualifying retirement account for the purposes of these provisions.
- Student Loans
Traditionally, employers were able to provide their employees with contributions in the form of tax-free tuition assistance. Under the CARES Act, they can now also provide them with temporary student-loan assistance. Between March 27 and December 31, 2020, employers can provide up to $5,250 in loan repayment assistance or other education assistance payments.
Also, for some borrowers, monthly repayments for student loans have been suspended from the period of March 13 to September 30, 2020. Interest will not accrue during the suspension period. Note that repayment suspensions apply only to federal loans and do not apply to private student loans.
Analysis of CARES Act Opportunities
Some of the benefits from the CARES Act are obvious, such as those provided to individuals with student loans and for wealthy retirees who do not need required minimum distributions as they can benefit from an additional year of tax-deferred growth on what would have distributed during 2020.
Some less obvious opportunities are available for US persons residing in Canada who want to transfer their retirement accounts to a Canadian RRSP.
Individuals intending to perform backdoor Roth IRA conversions will also benefit from the prorated tax inclusion over three years by requiring less outside funds to pay for the resulting income taxes.
However, we anticipate limited circumstances where retirement account loans will be beneficial as they rob individuals of the tax-deferred growth on the borrowed amounts.
Depending on an individual’s facts and circumstances, they may be well situated to benefit from the CARES Act. We invite interested individuals to consult us about tax planning strategies that can be further augmented by using some of the new provisions under the CARES Act.