CARES Act for Self-Directed Financial Investors: QRP, SDIRA, & Solo 401k

In this post, we focus on CARES Act implications & strategy for tax-favored self-directed retirement accounts: Individual Retirement Arrangements (IRA), Qualified Retirement Plans (QRP), Self-Directed IRAs (SDIRA), Solo 401k, Employer 401k plans & many other QRPs.

The CARES Act, short for Coronavirus Aid, Relief, and Economic Security Act, is a massive $2,000,000,000,000+ tax and spending package signed by President Trump on March 27, 2020. The CARES Act includes many forms of financial relief for businesses and individuals.

CARES Act Retirement Plan Provisions impacting self-directed retirement accounts are:

  • Coronavirus‐Related Retirement Account Distributions
  • Increased Plan Loan Limits and Extension of Due Date
  • Waiver of Required Minimum Distributions (RMDs) for 2020

What are the tax advantages of a Coronavirus‐Related Retirement Account Distribution?

  • The 10% additional income tax penalty on early distributions does not apply to “coronavirus‐related distributions” made to QRP & 401k plan participants or IRA owners on distributions up to $100,000.
  • Although a Coronavirus‐Related Retirement Account Distribution is not subject to a 10% penalty, it is subject to regular income tax – unless you take steps to eliminate the tax (see below).

Note: For purposes of the $100,000 limitation, any (and all) distributions made to an individual from any eligible retirement plan are aggregated.

How can I manage tax liability for a Coronavirus‐Related Retirement Account Distribution?

  • The new provisions provide you with the ability to spread the applicable income tax ratably over a three‐year period, if desired.
  • You also have the option of repaying the distribution to a QRP or to an IRA to eliminate income taxes on the distribution. This provision creates a limited-time opportunity to get control of your “captive”401(k) money – tax & penalty free – for contribution to a ReSure Investor Account.

What is a retirement account Coronavirus‐Related Distribution?

Coronavirus‐related distributions are any distributions made from eligible retirement plans, provided the distribution is made on or after January 1, 2020 and before December 31, 2020 to an individual:

  • who is diagnosed with COVID‐19 by a test approved by the Center for Disease Control and Prevention
    (CDC), or
  • whose spouse or dependent is diagnosed with COVID‐19 by a test approved by the CDC, or
  • who experiences adverse financial consequences as a result:
    • of being quarantined,
    • being furloughed, laid off, or having their hours reduced as a result of COVID‐19, or
    • being unable to work due to lack of child care resulting from COVID‐19, or
    • closing or reducing hours of a business you own or operate, as a result of COVID‐19, or
    • other factors as determined by the Secretary of Treasury.

For this purpose, eligible retirement plans include: 401(k) plans and other qualified plans, 403(b) plans, and governmental 457(b) plans as well as IRAs (including SIMPLE IRAs and SEPs).  A plan can permit coronavirus‐related distributions up to $100,000.

What withholding rules apply to a Coronavirus‐Related QRP Distribution?

Coronavirus‐Related QRP Distributions are not treated as eligible rollover distributions for purposes of the withholding rules under IRC §3405 and, therefore, are not subject to mandatory 20% federal withholding. Rather, they are subject to a default withholding rate of 10%, unless elected otherwise by the participant.

What are the CARES Act increased plan loan limits?

  • The CARES Act increased the maximum amount available for participant loans to “qualified individuals” from the lesser of 50% of a participant’s vested account balance or $50,000 to 100% of a participant’s vested account balance up to $100,000.
  • These new loan limits apply to loans made to qualified individuals from March 27, 2020 (the date of enactment) to September 23, 2020 (180 days after the date of enactment).

For this purpose, “qualified individuals” are any individuals who meet the criteria (discussed above) to be eligible for a coronavirus‐related distribution.

What are the CARES Act QRP loan extension due dates?

  • The CARES Act also provides relief to “qualified individuals” with outstanding plan loans (on or after March 27, 2020) by allowing suspension of loan payments (due from March 27, 2020 through December 31, 2020) for a period of up to one year.
  • During the suspension period interest continues to accrue, and the term of the loan may be extended for a period of up to one year without violating the 5‐year maximum term under IRC §72(p)(2).

For this purpose, “qualified individuals” are any individuals who meet the criteria (discussed above) to be eligible for a coronavirus‐related distribution.

What impact does the CARES Act have on self-directed retirement plan RMDs?

  • The CARES Act waives the requirement for required minimum distributions (RMDs) for defined contribution plans (including 403(b) plans and governmental 457(b) plans) and IRAs for any RMD that would otherwise be due during 2020. This includes RMDs due to participants and IRA owners whose required beginning date is April 1, 2020 (for their 2019 RMD), but who did not take their first RMD by December 31, 2019.
  • If a participant or IRA owner has already taken an RMD in 2020, they are permitted to roll that amount to an IRA or other qualified plan (that accepts rollovers) to defer taxation. Note: At present, the rollover must be made within the 60‐day period following the distribution. We would expect, however, that the IRS will issue guidance extending the window for such rollovers.

Corona Virus Self-Directed Retirement Account FAQ

With the recent IRS postponement of the tax filing deadline to July 15, 2020, do businesses now have until that date to fund employer plan contributions?

Yes, if the employer’s return was originally due on April 15, 2020.

IRC §404(a)(6) provides that “a taxpayer shall be deemed to have made a payment on the last day of the preceding taxable year if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including extensions thereof).”

Does the tax filing postponement also extend IRA contribution deadlines?

Yes. IRC §219(f)(3) states that “a taxpayer shall be deemed to have made a contribution to an individual retirement plan on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (not including extensions thereof).” While extensions are generally not recognized for this purpose, IRS Notice 2020‐18 specifically refers to this as a postponement (rather than an extension), so the July 15, 2020 due date will also apply for purposes of funding IRA contributions.

Must a QRP provide all CARES Act retirement account relief provisions?

A plan is not required to permit coronavirus‐related distributions or loans (as permitted under the CARES Act); these provisions are optional. As far as the waiver of RMDs due in 2020, it appears the changes are required.

The current economic environment, in which many are now between jobs or are experiencing financial hardship due to Covid-19, presents unique opportunities to get control of your 401k funds to invest on your terms. Your 401k money, which has been locked-up, may now be accessible to you for self-directed investing – and, as we emerge from the Covid-19 financial slump there will be huge opportunities for well-funded self-directed investors.

At ReSure LLC we aim to support you with the highest quality educational resources for your self-directed investing –  and continue to do so during these challenging times with well-researched updates. ReSure Financial wishes you and yours the best of health – both physically & financially.