Questions Concerning TSP and the CARES Act
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. Since then we have received numerous questions and wanted to share them specifically as they apply to TSP.
Question 1: I’ve heard that the CARES Act is waiving Required Minimum Distributions (RMDs) for 2020. Who does this apply to?
Answer 1: This applies to separated TSP participants that are age 70 ½ or older in 2019. If they are turning 70 ½ in 2020 or later, the SECURE Act extends RMDs to the year a TSP or other retirement plan owner attains age 72. The CARES Act has waived RMDs in 2020 for separated TSP, 401(k), 403(b), and 457 participants along with traditional IRAs SEP IRAs, SIMPLE IRAs, and Inherited IRAs.
If a TSP participant is still working beyond their required beginning date, they will not have had to take an RMD until they retire.
Question 2: When will I be eligible to apply for the increased TSP loan options that were included in the CARES Act?
Answer 2: The TSP bulletin board’s update on May 18, 2020 states that loan options will be available no later than June 22, 2020 for TSP participants affected by COVID-19. Both loan and withdrawal options are available to you only if you meet one or more of the following criteria:
You have been diagnosed with the virus SARS–CoV–2 or with coronavirus disease 2019 (COVID–19) by a test approved by the Centers for Disease Control and Prevention. Your spouse or dependent (as defined in section 152 of the Internal Revenue Code of 1986) has been diagnosed with such virus or disease by such a test. You are experiencing adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.
Temporary Loan Options for affected individuals:
Increased maximum loan amount The maximum loan amount is increased from $50,000 to $100,000, and the portion of your available balance you can borrow is raised from 50% to 100%. The deadline for applying for a loan with this increased maximum will be in September 2020. TSP will announce the exact cutoff date soon.
Temporary suspension of loan payments
You may suspend your obligation to make payments on your TSP loan or loans for 12 months, which will also extend the term of your loan by 12 months. This applies to existing loans and loans taken in the remainder of 2020. TSP will make a new form available for you to request this suspension. You have until December 31, 2020, to have your payments suspended.
Question 3: What are the CARES Act TSP withdrawal options and when will they be available?
Answer 3: The CARES Act created special rules for most types of TSP withdrawals made by participants affected by COVID-19.
TSP is working on a new, temporary withdrawal option that will waive the usual in-service withdrawal requirements and allow all COVID-affected participants to waive tax withholding. TSP states that details will be available soon.
A coronavirus-related distributionis “a distribution (withdrawal) that is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020, up to an aggregate limit of $100,000 from all plans and IRAs.” That means $100,000 is the maximum amount across all your retirement plans combined and includes special tax advantages.
You must designate your withdrawal(s) as a coronavirus-related distribution when you file your taxes. To do that, you’ll file Form 8915-E, which the IRS is expected to make available before the end of 2020.
Meanwhile, many TSP participants that are affected by COVID-19 can take advantage of the withdrawal provisions of the CARES ACT, using withdrawal types for which they are already eligible:
· Current federal employees are eligible under the existing in-service withdrawal rules: such hardship withdrawals and age-based in-service age 59 ½ or older
· Separated from service during the year you reached 55 or later (50 for special category employees) or a beneficiary participant. You may be eligible for favorable tax treatment right now without waiting for the new withdrawal option to be available.
Question 4: Can I take a withdrawal from TSP pre-59 ½?
Answer 4: TSP is working on making this available by June 22, 2020. If you designate your withdrawal as a coronavirus related distribution when you file your taxes, the IRS will waive the 10% additional tax on early distributions.
Question 5: If I need to take a coronavirus related distribution, will the IRS waive the taxes owed?
Answer 5: No, but good try! The IRS is providing more favorable tax treatment. You may spread the distribution proportionately over a three-year period, starting with the year in which you receive your distribution. Example: Megan receives a $30,000 coronavirus-related distribution in 2020. She could report $10,000 of income on her federal income tax return for 2020, 2021, and 2022. This is optional and you could also choose to include all the income in the year of the withdrawal.
Question 6: If I take a coronavirus related distribution, does TSP withhold federal taxes?
Answer 6: No, they will not withhold the mandatory 20% unless you request tax withholding.
Question 7: My husband was diagnosed with the coronavirus and it is hard to pay our bills right now with his loss of income. If I do take a distribution from my TSP and am able to pay it back, is that permitted?
Answer 7: Yes, this would count as a coronavirus-related distribution (CRD) and you could repay all or part of the amount of the distribution back to TSP or an eligible retirement plan, provided that you complete the repayment within three years after the date that you received the distribution. If you repay a coronavirus-related distribution, the distribution will be treated as though it were repaid in a direct plan-to-plan transfer so that you do not owe federal income tax on the distribution.
Please contact us if you have any questions about the CARES Act provisions and how they apply you.
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