The CARES Act Impact on Retirement Assets
Apr 13, 2020
This bill was introduced as the largest economic relief package in U.S. history. The CARES Act provides emergency assistance to small businesses, increases unemployment benefits and injects over $130 billion to the healthcare system among many other provisions. The CARES Act also provides relief for retirees in 2020 while making some smaller adjustments to charitable gifts.
The following summary is meant to focus on the important updates regarding individual and employer retirement plans as well as charitable contributions for 2020.
Filing Deadline has moved to July 15th, 2020:
- Federal tax return filing date
- IRA and ROTH IRA contributions for 2019 also need to be made by this date
COVID-19 Related Retirement Distributions
- The CARES Act waived the 10% penalty for 2020 distributions up to $100,000 taken by individuals under age 59 ½. Distributions can be made from a combination of IRAs and/or employer plans. The mandatory withholding from employer plans is also waived. The taxes related to the distribution are still due but can be spread over 3 years and the funds can also be repaid over a 3-year period.
- Individuals over 59 ½ who are not affected by the penalty can also take advantage of the 3-year rule.
- The Act stipulates that individuals taking such distributions should meet one of the following conditions:
- Have been diagnosed with COVID-19
- Have a spouse or dependent who has been diagnosed
- Have experienced adverse financial consequences as a result of being furloughed, laid off, or have had a reduction in work hours due to the pandemic
- Have had their ability to work compromised because of having to care for a minor child impacted by the virus
- Own a business that has been closed because of the pandemic
- Loans from employer plans (e.g., 401ks) have also been modified. Specifically, the Act increases the current limits on loans from the lesser of $50,000 or 50% of the vested balance and increases it, for 2020, to the lesser of $100,000 or 100% of the vested balance.
Required Minimum Distributions (RMDs) Waived for 2020
- By eliminating the need for individuals to take RMDs for the year, the Act enables individuals to reduce their taxable income (and taxes owed) for 2020.
- This is a significant tax break as 2020 RMD’s are based on the December 31st, 2019 IRA account value. The Dow Jones Industrial Average closed 2019 at 28,538 and ended March 31st, 2020 at 21,917; a loss of 23%. Without this relief package, IRA owners who were at least 70 ½ years old in 2019 would have been subject to required distributions based on much higher account values and be responsible for the associated income taxes.
- Note: the SECURE Act increased the RMD age to 72 but within the legislation, it still required those individuals who turned 70 ½ in 2019 to take their 2019 RMD by April 1, 2020. As a result of the CARES Act, those IRA owners who turned 70 ½ in 2019, and chose to delay taking their first RMD until the 4/1/2020 deadline, are not required to take their 2019 or 2020 RMDs.
2020 RMDs that have already been distributed
- Taxpayers who have already taken all or a portion of their RMD from their IRA in 2020, can take advantage of the 60-day rollover rule to move the money back into the IRA.
- IRA owners who took very early distributions in January 2020 have missed the 60-day rollover window but can take advantage of the liberal CARES Act provisions which allow IRA distributions made in 2020 to be paid back over a three-year period as part of a coronavirus-related distribution.
- For non-designated beneficiaries of an IRA (i.e., charities, estates, certain trusts) distributions are required to be made over a five-year period beginning with the year following the year of death if the IRA owner died before their required beginning date. Prior to the SECURE Act of 2019, the required beginning date was April 1st of the year following the year the IRA owner turned 70 ½. The CARES Act applies a special provision for these beneficiaries. Effectively, the Act states that any non-designated beneficiary who inherited an IRA from someone who passed away as recently as 2015 is now eligible to skip 2020 as one of the five years and complete the final distribution in 2021. (In this example the five-year clock would have started in the year after death – 2016 – and would have ended in 2020. Now, these particular beneficiaries get a sixth year to empty the inherited IRA).
- Other beneficiaries who inherited IRAs prior to 2020 who have already begun taking distributions based on their own life expectancy (pre-SECURE Act rules), can opt not to take their 2020 RMD distribution and resume in 2021.
- Non-eligible designated beneficiaries subject to the new 10-year rule created by the SECURE Act are not impacted by the 2020 RMD waiver. The new 10-year rule does not require annual distributions to be made. The Act stipulates that the IRA simply must be drained of its assets by the end of the tenth year following the year of death.
Charitable Contribution Updates
- The CARES Act eliminates the 60% of AGI limit on charitable contributions made with cash and raises it to 100% of AGI for 2020 only.
- While RMDs have been suspended from IRAs for 2020, Qualified Charitable Distributions (QCDs) can still be made from an IRA directly to a recognized charitable organization. IRA owners must be at least 70 ½ or older at the time of the qualified distribution. Such distributions are not subject to income tax.
As always, if you have any significant changes in your life or a question or concern about your portfolio, please do not hesitate to reach out to us. Please consult with your tax advisor before taking any action regarding the above.
Withum Wealth Management wishes you good health during these unprecedented times.
Authors: Tom Farrell | email@example.com and Alexander Smit | firstname.lastname@example.org
Withum Wealth Services
Important Disclosure: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Withum Wealth Management. [“WWM”] ), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article/newsletter serves as the receipt of, or as a substitute for, personalized investment advice from WWM. Please remember to contact WWM in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. WWM is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the WWM current written disclosure statement discussing our advisory services and fees is available for review upon request.