In this time of financial uncertainty brought about by the COVID-19 pandemic, you may be more concerned than ever about protecting your retirement accounts — or you might need to tap these funds now even though you haven’t yet reached retirement. Tucked into the Coronavirus Aid, Relief, and Economic Security (CARES) Act are several provisions that may provide some assistance. Here are some highlights. Keep in mind that there may be further developments not available at the time of this writing.

Normally, with a few exceptions, if you’ve reached age 70½, you’re subject to the required minimum distribution (RMD) rules for traditional IRAs, 401(k) plans and other defined contribution plans. You also generally are subject to these rules if you’re younger and inherited one of these accounts from someone other than your spouse. The RMD rules require you to withdraw a specified percentage of your account (based on your age) each year or face a 50% penalty on the amount you should have withdrawn but didn’t. 

(Be aware that last year’s SECURE Act raised the age after which original account owners must begin taking RMDs to 72 for those who didn’t turn age 70½ before January 1, 2020. It also changed the rules for taxpayers who inherited accounts from a nonspouse who died after December 31, 2019. Contact your tax advisor for details.)

For 2020, the CARES Act suspends RMDs. This can be beneficial for a couple of reasons. To start, drops in the stock market could mean withdrawing a larger portion of your account to satisfy the RMD requirement than would otherwise be the case. The reason? Your RMD is calculated using your account’s value as of December 31, 2019. So if, say, your 2020 RMD would have been 5% of your December 31, 2019, account value, that dollar amount might be a much larger percentage of your account value when making the withdrawal in 2020.

On top of that, federal income taxes generally are due on distributions. Depending on the state, there also may be state income tax liability. Being able to forgo the RMD allows you to continue to defer the tax.

What if you took an RMD before the CARES Act was signed into law and would like to return it to your retirement account? If your plan permits it or it’s an IRA, you may be able to do so. But you must act fast. IRS Notice 2020-51 generally allows RMDs taken in 2020 to be returned by Aug. 31, 2020. (It’s possible this deadline could be extended, so check with your tax advisor for the latest information.)

At the same time, the RMD waiver doesn’t prohibit you from taking a distribution. If you will be in a low tax bracket in 2020, taking a distribution and paying taxes at a low rate may make sense.

The CARES Act has made available some potentially useful ways to improve your financial position at this difficult time. But the ins and outs are complicated. Your accounting professional can help you determine the best course of action for your situation, factoring in the tax consequences.