How COVID-19 and the CARES Act Impact Financial Planning
There are changes that are coming every day as we continue to deal with the effects of COVID-19 in our personal and business lives. As a Financial Planner, I would like to summarize how recently passed legislation has provided you with options and may impact some of your financial decisions. There are several new relief provisions that many people can benefit from immediately.
Extended deadline for 2019 IRA contributions
When the tax return filing deadline for 2020 was extended to July 15th, it was not clear if that would impact the deadline for 2019 IRA contributions. The IRS has since confirmed by issuing its guidance, “Filing and Payment Deadline Questions and Answers”, that individuals have until July 15th to decide if they want to make contributions to their IRAs for 2019. Individuals have more time to see how the COVID-19 pandemic affects their financial situation and if it is feasible to make a 2019 contribution. If you are contributing to your IRA for 2019 after April 15, 2020, take extra care to make sure your IRA custodian is properly coding your contribution for 2019, because many computer systems may default to the new year.
RMDs waived for 2020
For individuals who are old enough to have already begun taking Required Minimum Distributions from their IRA each year, the CARES Act gives you the option to opt-out of taking an RMD in 2020. This is a big relief for IRA account holders who finished the year with record high balances in their portfolio, only to see the values drop precipitously since. Many IRA account holders don’t want to sell holdings in their IRA in a down market if they don’t need the money. In addition, for those individuals who turned 70 ½ in 2019 and were required to take their first RMD for 2019 by April 15, 2020 but have not yet done so, that RMD has been waived, too! Unfortunately, if you have already taken your first RMD in 2019, you won’t benefit from the waiver for 2019, but your 2020 RMD is still waived.
IRA Beneficiaries subject to 5-year rule
A lesser known benefit of the CARES Act applies to beneficiaries who inherited IRAs in 2015 or later and are subject to a five-year payout. For non-designated beneficiaries who inherited IRA assets through a will or trust, effectively with the 2020 RMD waiver, the 5-year rule now becomes a 6-year rule.
Can you undo RMDs already taken?
The relief package does not directly address the issue of repayment of RMDs already taken for 2020, so the IRS will have to issue guidance on this issue. The only potential workaround is the 60-day IRA rollover provision. IRA account holders who took distribution within the last 60 days have the option to roll it back into an IRA within 60 days of the distribution.
Waiver of early distribution penalty
The CARES Act waives the 10% early distribution penalty on 2020 distributions up to $100,000 from IRAs and company-sponsored retirement plans for “affected individuals”. The “affected individual” designation is similar to what was previously used to designate individuals affected by a natural disaster. If you are taking an early distribution and expect to be exempted from the penalty, be prepared to demonstrate to the IRS that you were financially “affected” by the COVID-19 pandemic. The account owner would still be liable for income tax, but without the normal penalty for account holders that are younger than 59 ½. The income taxes can also be paid over three years instead of the usual one year. This three-year spread is particularly helpful for households facing financial hardship due to the pandemic.
Increased loan limits on company-sponsored retirement plans
Another option to assist households facing financial hardships is to take a loan against their company-sponsored retirement plan. Those with retirement plans like a 401(k), that previously limited employees to borrowing up to $50,000 against their account, can now borrow up to $100,000. However, the maximum loan amount is still the lesser of 50% of the account balance or $100,000. This rule only applies to a loan taken within 180 days of when the bill was enacted (March 27, 2020), so households have through September to decide if they want to go this route.
Another provision from the CARES Act to not overlook is that any loan repayments from previously taken loans on 401(k) plans that are normally due between the bill’s enactment and the end of 2020 could be suspended for one year. Individuals should keep in mind that when they leave their current employer, any loans on a 401(k) are due in full and any amounts not paid are coded as a withdrawal against the plan. This could cause a problem in future years if career plans change. While the early distribution penalty is waived in 2020, taxes would still have to be paid if the individual was laid off after 2020.
Please feel free to call me at 404-879-3420 to discuss these changes or anything else regarding financial planning. We would be happy to provide you with guidance.