The Cares Act is a $2 Trillion COVID 19 Stimulus Package, which gives retirement investors some help in alleviating financial stress and strain from the Coronavirus.
The CARES ACT OF 2020:
- Suspends Required Minimum Distributions;
- Enhances Access to and Helpfulness of “Coronavirus-related” Retirement Fund Withdrawals and Loans;
- Extends the Deadline for making 2019 IRA contributions to July 15; and
- Gives Additional Tax Incentives for Charitable Giving
1. Suspends Required Minimum Distributions from the Retirement Accounts of All Taxpayers.
General Rule:
A suspension of 2020 required minimum distributions (RMDs) is among the numerous provisions of the massive federal aid package, the Coronavirus Aid, Relief, and Economic Security Act or CARES Act, which the President quite recently signed into law. We saw this in 2009, during that time of economic disaster, and now here again Congress has provided relief by allowing RMDs due in 2020 to be waived. You do not have to take them; this will reduce your 2020 tax bill and otherwise provide some relief from the economic and social turmoil.
Applicability:
The suspension applies to certain defined contribution plans and to IRAs. This includes all traditional IRAs (even those, of course, that some companies might label as “IRA” “rollover IRA”, “standard IRA” or “traditional IRA”), SEP IRAs, and SIMPLE IRAs as well as 401(k), 403(b), and governmental 457(b) employer sponsored plans.
In this regard, we remind the reader that the SECURE Act, as we had reported in an earlier post – 7 Highlights of the Secure Act, provides that individuals that turned 70 ½ years of age before 01 January, 2020 permanently retain the year in which they turned that age as their RMD “start” year. Those that, on the other hand, turned or will turn 72 in the year 2020 or later have an RMD “start” year of the year in which they turned or turn that later age.
There is some measure of confusion – because they are not expressly mentioned in the CARES Act’s remedial provision – regarding whether the RMD suspension pertains to inherited IRAs (Roth and traditional) and inherited 401ks. However, because the Act (1) is designed to provide broad relief to Americans during the pandemic emergency, and (2) is not a technical tax bill looking for revenue, we can expect the IRS and the government eventually to interpret it as applicable to inherited retirement accounts. Indeed, most writers addressing the topic boldly state that the RMD waiver applies to Inherited traditional and Roth IRAs.
Interestingly, by contrast, the Act does expressly address inherited retirement accounts that subject beneficiaries to the five-year payout rule. The CARES Act extends the payout window by one year. Since 2020 is now excluded from the count, the statute simply states that, if one of the five years is 2020, beneficiaries get an extra year, effectively turning a five-year rule into a six-year rule.
Notably, if the Act expressly grants relief to five-year rule inherited accounts, it likely also applies the same relief to all manner of inherited qualified plans and accounts.
Happily, there is still time – to the end of the year – to make a final decision about taking RMDs from inherited IRAs and inherited employer sponsored retirement plans. Accordingly, the reader has the option to wait and to monitor the situation for further IRS and/or Congressional guidance or for even more definitive confirmation of applicability. In this regard, obtaining expert tax advice on this and all other matters raised in this article is highly recommended.
Benefits:
Suspension of the RMD requirement will lend some assistance to an already beleaguered American public that is encountering ever harsher economic and social conditions. Among many benefits, the waiver will (a) reduce taxpayers’ income tax burdens, (b) allow them to keep their retirement monies (the RMD monies that were not paid out) in a productive tax-deferred growth environment, and (c) will allow investor portfolios to recover from stock and bond market losses. The public can take a breath on RMDs for a while, in order to allow recovery from savings and other economic maladies.
On the other hand, despite an intuitive sense that one should exercise the option not to take RMDs, there are at least two circumstances, in which one might consider, nevertheless, making 2020 withdrawals from their IRAs. The first, of course, is the situation where one categorically needs the money (and has no other more desirable source) to sustain day-to-day life; if you need the money, you simply need the money. In this regard, many people have grown used to and rely upon receiving a steady income from their IRAs. The CARE Act does not create any downside. The RMD suspension simply puts control back in your hands. You can withdraw or not, depending on your own situation. There are no rules about which to worry.
The second such circumstance is a situation where the taxpayer is destined to be in a very low tax bracket in this most trying year. It just might pay to get some of that IRA money withdrawn (the RMD amount or even more), or converted into a Roth IRA, to take advantage of today’s historically low tax rates.
Caution:
As the foregoing and, indeed, all of our discussions about general, retirement and other savings amply demonstrate, each and every individual has his or her own unique positions, issues and circumstances. Everyone is well-advised to retain and to consult with expert tax, estate and comprehensive financial planning professionals, in order to develop individualized legal interpretations, approaches, plans and strategies.
2. Enhances Access to and Utility of 2020 Retirement Fund Withdrawals, so long as they are “COVID 19 Related”.
In addition to suspending required minimum distributions (RMDs) for the year 2020, the CARES Act created a new exception to the 10% early withdrawal penalty tax under IRS Code section 72(t) for those who take retirement distributions prior to age 59.5. Specifically, in the year 2020, eligible coronavirus affected retirement plan participants and IRA owners can take penalty-free distributions from some or all their retirement accounts in an aggregate amount of up to $100,000.
Notably, these rights are retroactive; pre-CARE Act year 2020 distributions to eligible taxpayers, to the extent that they do not already exceed $100,000, are absolved of the 10% early withdrawal penalty and enjoy the benefits associated with the new regime created for affected persons.
In order to facilitate this measure of relief, moreover, the CARES Act (1) relieves these types of withdrawals of the 20% mandatory withholding for taxes that generally shrink most other retirement plan withdrawals; (2) permits, but does not compel, administrator-employers to allow “in-service” (namely, while the person still works for the employer) distributions from qualified retirement plans to eligible plan participants; and (3) allows employer-sponsored plans to rely upon a plan participant’s certification that he or she is a coronavirus affected person.
Not all retirement plans will allow these COVID-19 withdrawals, so check with your plan administrator in the case of an employer-sponsored retirement plan like a 401(k) to see if your plan will be offering this option. No “in-service” distribution restrictions exist for personal IRAs.
To Qualify:
The withdrawal(s) must be COVID 19 related, that is, the taxpayer (or his or her spouse or dependent) must either have been diagnosed with COVID-19 or experience adverse financial consequences, as a result of quarantine, furlough, lay-off, reduced work hours, no available childcare, business closing or reduced business hours (if self-employed), or other factors determined by the Secretary of the Treasury.
Although, by compelling logical extension, COVID 19 affected taxpayers over the age of 59.5 should also be entitled to the above benefits for their own 2020 distributions up to an aggregate amount of $100,000, the statute does not expressly confirm this theory. Hopefully, again, Congress and/or the IRS will clarify this ambiguity. Readers are advised to proceed with caution and only with the advice of a tax professional.
Unfortunately, but not surprisingly, Income taxes will still apply to these distributions, but the taxpayer may elect to spread the income tax burden “ratably”, which, presumably, but not definitely, means evenly over 3 years. Or, he or she has the option to repay (effectively to return, and thereby “rollover”) some or all of the aggregate distribution to an eligible retirement plan or plans within that same three-year period; this can be done in a one-shot deal or in partial repayments. These “rollover” repayments will reduce pro rata or, if the entire amount is repaid, will eliminate the tax burden. Appropriate income tax return reporting and adjustments must, of course, be made for that same three-year window of time.
The rules surrounding these measures of relief from the full negative impacts of an IRA or retirement plan withdrawal are obviously rather complicated. This is especially true of the intertwined three-year tax deferral and distribution rollover rights and their associated income tax consequences. The same will likely be the case for relief qualification and documentation. The reader is well-advised to proceed only after consultation with a qualified tax professional. It is also advisable to look for further Congressional and/or IRS clarification and guidance.
3. Doubles Access to and Broadens Repayment Terms of “COVID 19 Related” Employer-Sponsored Retirement Plan Loans.
For those same Coronavirus affected individuals to whom the changes in the early withdrawal rules apply (see Part 2, above), the CARES Act offers several advantageous provisions regarding loans from qualified retirement plans.
First, the CARES Act increases the maximum amount for loans that are made between the date of enactment of the CARES Act (March 27) and December 31, 2020, from the lesser of $50,000 or 50% of the vested account balance, to the lower of $100,000 or 100% of that same balance.
The CARES Act also provides that impacted participants who have a retirement plan loan repayment due between March 27, 2020 and December 31, 2020 are not required to make any loan repayments for one year. And, at that point, they may extend the loan repayment period by one (in point of fact, extra) year; stated otherwise the plan participant has an extra year to pay back his or her loan, once payments resume a year down the road.
As is the case with their withdrawal rules’ counterparts (See Part 2, above) the CARES Act allows, but do not require that Plan Administrators adopt the modified loan guidelines. Interested otherwise eligible readers should check with their employers about loan availability, in general, and Coronavirus enhanced loans in particular. Loans from personal IRA accounts simply are neither contemplated or permitted. There is no change to the prohibition against such loans.
As was the case with withdrawals, retirement plan administrators can rely on an individual’s certification that the loan meets the criterion for being “COVID 19 related”.
4. The CARES Act Extends to July 15, 2020 the Deadline for 2019 Contributions to IRA’s.
Please take a few moments to read our post on the IRA Contribution Extension.
5. Tax Deductible Charitable Contributions.
The Tax Cut and Jobs Act of 2017 effectively prevents the vast majority of taxpayers from itemizing deductions, due to both a dramatic increase in the amount of the standardized deduction and the $10,000 cap on the deductibility of SALT (State and Local Taxes). These tax reforms eliminated the ability for many to “write off” charitable contributions on their taxes.
Easing this result a tiny bit, The CARES Act allows for a $300 above-the-line deduction for charitable contributions made to 510(c)(3) tax-exempt organizations. The deduction applies to monetary contributions and is, of course, available to all taxpayers, both to those who still itemize and to those that take the standard deduction.
For those taxpayers that will be able to itemize charitable deductions on their 2020 tax returns, on the other hand, the Cares Act increases the 60% of adjusted gross income to 100% of same. For corporations, the 10% limit on charitable contributions is increased to 25% of taxable income. However, contributions to 509(a)(3) charitable organizations (commonly known as sponsoring organizations) and to donor advised funds are expressly excluded from these enhanced deductions.
All of the above changes to the rules for charitable giving go into go into effect beginning in the 2020 tax year.
In our next publication, we will discuss the use of IRA accounts for charitable giving through a vehicle known as a Qualified Charitable Distribution. So-called QCDs that both reduce the taxable income in your IRA through a direct transfer to a bona-fide charity and rewards the gracious donor with an above-the-line full deduction. This method is a marvelous way to make charitable contributions in an era where below the line tax rewards are minimal or non-existent for most of our readers.
Meanwhile, you can read more on the topic of charitable giving through life insurance.
Disclosure
Once again, we urge our readers to speak with their tax professionals before employing any retirement account or tax strategies. You can find more information at the IRS website.
Indeed, we publish the above discourse solely to provide general information, and not as professional, fiduciary or other manner of advice). You are encouraged to consult expert tax, estate and financial advisors and planners (1) with respect to any questions or issues, and (2) to determine how these new laws (and resulting regulations) may affect your personal situation and to consider setting appropriate plans and strategies in consultation with such expert advisors and planners. You are encouraged to study these developments, as they continue to occur.
This article is written by, our very own, Eugene Luciw.