Congress CARES About Your Retirement

Corona Aid, Relief, and Economic Security Act (CARES Act)As part of its response to the pandemic, Congress passed the Corona Aid, Relief, and Economic Security Act also known as the CARES Act. That acronym is in the law itself.

A portion of the law is devoted to retirement accounts and the enhanced ability (for some) to access those amounts during the current health crisis. In a divorce, retirement plans take on even greater importance because they are often part of the marital estate that is divided.

So, why should you care about CARES?

If you qualify, retroactive to January 1, 2020, you would have the ability to withdraw up to $100,000 from your IRA or 401(k) with no 10% early withdrawal tax penalty most people have to pay until they turn 59 ½. The tax consequences can also be spread over three years and the distributions can be replaced within three years without tax implications. If you do pay taxes, but are able to repay the funds within three years, you would be able to amend your returns to recover those taxes.

But beware: If you withdraw money from an account that has lost value and will likely regain it, how much is that withdrawal actually costing you?

If you qualify, CARES also lets you take up to $100,000 in loans and up to 100% from your retirement plan (instead of the previous limits of $50,000 or 50%). You can delay repayment of these loans for up to a year.

Who qualifies?

According to the new law, these benefits are available to “Coronavirus Related Distributions” or CRDs, which only apply to:

  • Individuals diagnosed with COVID-19;
  • Those who have a spouse or dependent who is diagnosed with COVID-19; or
  • Those who experience adverse financial consequences as result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work because of a lack of child care due to COVID-19, closing or reduced hours of businesses owned or operated by the individual because of COVID-19, or other factors as determined by the Treasury Secretary.

Chances are, if your income has been affected by the pandemic, you will be eligible to participate. However, because this is a new law, the parameters of participation will not be fully known until the law has been tested.

In addition to these benefits, in an effort to help avoid the losses associated with selling at the bottom of the market, CARES features a temporary waiver of the required minimum distribution (“RMD”) rules. For the calendar year 2020, all RMDs are waived.

As you can see, many of the benefits of CARES are aimed at dealing with the volatility of the market, which can have a huge impact on the value of a retirement plan.

In a divorce, retirement accounts are often divided to reach an equitable property distribution. When an account is divided so that each party gets a portion of the account, both parties accept the risk associated with that account. But what happens when a portion of a retirement account is being used to offset a flat dollar amount, say for attorney’s fees or support arrears?

Also given the current economic volatility, there may be difficulty discerning “true” value of an account or other asset. Normally, assets are valued as of the date of trial. However, it remains to be seen what the courts will do given that courts are required to make equitable divisions of property.

We can help guide you through the application of this new law and the considerations in obtaining a property settlement.

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