The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed and signed into law on March 27, 2020 with the objective of helping the economy weather the anticipated recession triggered by the COVID-19 virus. This relief package will affect most of us both directly and indirectly and may present opportunities for you to work with your JFS team to use provisions of the new law to your best financial advantage.
Your advisory team is currently digesting the new law and considering how it applies to your financial plan. Not all sections of the law will apply or be advantageous to everyone, so “no changes needed” may be the answer for some. Here is a brief summary of the provisions affecting individuals, along with planning opportunities that may be discussed and recommended by your advisor as the year continues.
Required Minimum Distributions (RMDs) Waived for 2020
As part of your tax-efficient planning, we have always stressed the importance of taking your annual RMD to avoid the 50% penalty as well as not taking more than you need in order to spread the income over as many years as possible. This strategy allows you to provide yourself with a steady income while paying taxes utilizing the lowest brackets each year.
For 2020, the government is allowing retirees who do not need RMD money to meet living expenses to leave funds in their retirement accounts. This change will allow investments inside of your IRA, 401(k), or other retirement account to recover value and prevent you from taking 2020 RMDs that were calculated based on the substantially higher account values on December 31, 2019. If not for this relief, retirement account owners would be forced to withdraw and pay tax on a much higher percentage of their retirement account balance considering account balances are currently lower than they were at the end of 2019.
- PLANNING POINT: You can minimize your 2020 income tax bill and give your IRA or retirement plan investments time to recover value if you are able to leave your 2020 RMD in your account by skipping this year’s distribution. If you do need some retirement account money for expenses, try to delay taking your distribution until later in the year. Your advisor will guide you on the best strategy for your specific situation and cash needs.
What if You Already Took Your 2020 RMD? Can it be Returned to Your Account?
The question of whether 2020 RMDs (or any retirement account distributions) already taken can be returned to your IRA, making your taxable distribution for the year zero, is unanswered at this point. The CARES Act relief bill does not include any specific repayment provisions, so the IRS will need to make a determination regarding how this issue will be handled.
- PLANNING POINT: Once guidance is released as to whether the IRS allows previously distributed amounts to be returned to an IRA or retirement plan, you and your advisor can discuss the effect on your cash needs, your tax return, and your overall investment portfolio.
Early Withdrawal Penalty Waived (Before Age 59-1/2)
The CARES Act waives the 10% early withdrawal penalty for distributions up to $100,000 from company retirement plans and IRAs for coronavirus-related purposes made on or after January 1, 2020. A coronavirus-related distribution is defined as one made to an individual:
- Who is diagnosed with COVID-19;
- Whose spouse or dependent is diagnosed with COVID-19; or
- Who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.
- PLANNING POINT: Income attributable to such distributions will be subject to tax over three years instead of all in 2020. As such, affected taxpayers may be able to pay less overall tax by using lower brackets in each of the next three years instead of bunching all additional income into one year. Planning with your advisor before making an early withdrawal decision is essential to help determine cash needs, quantify investment and tax ramifications, and project long-term financial plan adjustments needed (if any).
Three Years to Recontribute Funds to an IRA or Qualified Retirement Plan
Affected taxpayers who do take early distributions are permitted to recontribute distributed funds back into an eligible retirement plan or IRA within three years without regard to that year’s cap on contributions.
- PLANNING POINT: We still believe that best use of retirement money is for RETIREMENT. This approach gives you the best chance of having adequate funds available to enjoy your retirement years. If you need to temporarily use some retirement money to get through this coronavirus pandemic period, the opportunity to repay the funds during the three-year period will give you a way to rebuild retirement savings by repaying the funds as soon as possible.
2019 IRA Contribution Deadline Extended
As we have noted in previous communications, the IRS has extended the tax return filing date, including the 2019 tax payments due date from April 15, 2020 to July 15, 2020. As part of this change, the date for making 2019 IRA and Roth IRA contributions has also been extended to July 15, 2020. The rules for making eligible contributions have not changed; this change only pertains to the due date for making 2019 contributions.
- PLANNING POINT: If you or your spouse qualify to make IRA contributions for 2019, consider maximizing your 2019 contribution and deducting it on your 2019 tax return. However, it may not be best to delay funding the deposit until July 15, given the current buying opportunities that a down market provides. It is important to discuss your cash liquidity needs with your advisor and fund your IRA contributions before the current market recovers, which should occur before we see actual evidence of the COVID-19 clouds clearing.
Your Financial Plan
This limited summary of planning ideas incorporating law changes included in the recently passed CARES Act is meant to be general and informative in nature. Our hope is it will spark your interest and have you say, “Hey, that one might apply to me.” If that happens, contact your advisor with questions and/or discussion points of interest. Over the coming weeks and months we will be considering how these changes impact each of our clients’ financial plans.
Please stay safe and know that we are considering all ways your financial well-being is impacted by domestic and world events. Some financial plans will need to be adjusted; others will stay the course. We believe that continuing to work closely with your advisory team is the best way to achieve the goals of your personal financial plan.
Your advisory team is here to address your specific needs and remains ready, willing, and able to help any of your friends or family in this unusual and challenging environment. We encourage you to forward this to a family member, friend, or colleague you believe would find the information helpful and talk with your advisor about the best way to connect us, so that they can get the help they need. During times like this, great advice adds value by preventing financial mistakes and taking advantage of opportunities that can impact a lifetime of goals.