On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law in response to the global health crisis. In addition to providing funding for businesses, direct cash assistance, expanded unemployment benefits, and support for the healthcare sector, the CARES Act has relaxed penalties for early retirement withdrawals. If you are considering divorce or are dividing a 401(k) or IRA retirement account in your divorce, the new CARES Act is important to consider as part of your divorce planning.
The CARES Act and Retirement Accounts The CARES Act also makes it easier to borrow money from 401(k) and IRA accounts for people of any age, by raising the limit from $50,000 to $100,000. Additionally, the new law waives the early withdrawal penalty of 10% of the withdrawal amount for those under 59 1/2. 401(k) and IRA participants can also avoid taxes on the withdrawal by paying back the amount borrowed to the retirement account within three years. If the money cannot be returned, taxes can be paid over three years. The affected 401(k) participant or IRA owner (including a spouse or dependent) will need to either be diagnosed with SARS-COV-2 or COVID-19 or experiencing adverse financial consequences as a result of an event, including but not limited to quarantine, furlough, lay-offs, reduced work hours, no available childcare, business closing or reduced business hours for self-employed persons, or other factors determined by the Secretary of the Treasury. It is reasonable to assume that these requirements will be loosely interpreted given the national health crisis. Further, payment dates for any loans due for the rest of 2020 will be extended for a year. However, these new rules will not last forever.
The Impact on Dividing Retirement Accounts During Divorce In California, retirement accounts are considered community property, even if only one spouse, the participant spouse, contributed. Usually, when 401(k) plans and IRAs are divided in a divorce, the non-participant spouse rolls over their share into a new or existing Individual Retirement Account (IRA), while the participant spouse’s share remains in their original 401(k) or IRA. However, with many of the restrictions removed following the CARES Act, 401(k) and IRA participants may be able to access their 401 (k) and IRA now to fashion a better divorce settlement. For those contemplating divorce, it may make economic sense to move forward now and take advantage of the new legislation because may provide the 401(k) and IRA participants more economic room to maneuver post-divorce. Additionally, the new legislation may also give attorneys, working with a Certified Public Accountant (CPA) or tax attorney, the ability to fashion a financial settlement under the new legislation that is more advantageous to both parties.
A disclaimer here is necessary: this article is not specific tax advice for your situation. Whether you are going through a divorce or not, you should not use any of the information in this article for your tax planning without consulting with a CPA or tax attorney.