The CARES (Coronavirus Aid, Relief, and Economic Security) Act of 2020 provides a huge boost to business and individuals to keep the economy afloat. The most talked about provisions are direct payments to many individuals and couples (actually a new refundable income tax credit that is scaled down based on 2019 adjusted gross income), lending facilities for small businesses and loans to airlines and other severely damaged industries.
There are also significant provisions affecting retirement accounts which can impact your financial plan. Some provisions apply only if you have been affected by the Coronavirus, but some apply to everyone. You are deemed to be affected by the Coronavirus if you:
- Have been diagnosed with COVID-19;
- Have a spouse or dependent who has been diagnosed with COVID-19;
- Experience adverse financial consequences as a result of being quarantined, furloughed, being laid off, or having work hours reduced because of the disease;
- Are unable to work because of lack of childcare as a result of the disease;
- Own a business that has closed or operate under reduced hours because of the disease; or
- Meet some other reason that the IRS decides to say is OK. As with many tax laws, much of the interpretation is being left to the IRS.
Required Minimum Distributions
Required Minimum Distributions (RMDs) have been suspended for 2020. If you turned 70½ in 2019 and deferred your distributions until 2020, that required distribution is also suspended. If you are in a higher tax bracket, it may make sense to defer or at least reduce the amount of the distribution you receive in 2020. While distributions are not required, Qualified Charitable Contributions (QCDs) up to $100,000 are still permitted for those over 70½ so this remains the most tax efficient way to gift for many. RMDs are also waived for Inherited IRAs and if a decedent’s IRA is being paid out under the 5-year rule, it just became the 6-year rule. The new 10-year rule under the SECURE Act, though, does not become the 11-year rule because it will not apply until 2021 for beneficiaries of those dying in 2020.
If you have already taken your RMD this year but would like to put it back, you may still be in luck (note that this does not apply to Inherited IRAs). If the distribution has happened in the last 60 days, you can simply ‘roll’ it back into your IRA. If you are in the category of people affected by the coronavirus, then the distribution window is extended from 60 days to 3 years. (Update -On June 23rd, the IRS announced additional rollover relief to the effect that any RMDs taken in 2020 -including from Inherited IRAs – can be rolled back in before August 31st.)
Expanded Loan and Distribution Rules
Because many people’s employment will be impacted by the coronavirus, the Act broadens immediate access to retirement funds in several ways. These changes only apply if you are in the ‘affected by the coronavirus’ category and for the items involving retirement plans, your plan trustees will have to amend the plan to allow the changes.
Under the new rules, for new loans issued between March 27, 2020 and September 23, 2020, the maximum loan limitation has been increased from $50,000 to $100,000 and the 50% of account balance limitation has been increased to 100% of vested account balance. Also, any outstanding loan payments due between March 27, 2020 and December 31, 2020 may be delayed for 1 year.
For retirement accounts, both employer-sponsored plans and IRAs, the Act creates Coronavirus-Related Distributions. These distributions can be up to $100,000 and must be paid between March 27, 2020 and December 31, 2020. The 10% penalty for taking early distributions is waived. Typically, eligible rollover distributions from employer-sponsored retirement plans are subject to mandatory Federal withholding of at least 20%. Coronavirus-Related Distributions, however, are exempt from this requirement.
The distributions MAY be repaid to the retirement account, but it is not required. Repayment can take place anytime over the three years following the distribution. Taxation of the distribution may also be spread over 3 years (or included in 2020 if that is more advantageous). Planning around this can be complicated.
If in 2020 you anticipate being in a low-income tax bracket, purposefully or not, this presents an opportunity to take distributions at a lower 2020 tax rate. At the other extreme, if the distribution is repaid within 3 years, it is not taxed at all. But what if the tax is not paid for 2020 because you intend to repay it by 2022 and then don’t do it. You might still be able to spread the tax over three years but could have to file amended returns for 2020 and 2021.
One last note, since the tax return filing deadline for 2019 income tax returns was extended to July 15, the deadline for making a 2019 contribution to an IRA also is extended to July 15, 2020. Please don’t hesitate to reach out to discuss how any of these changes may impact your specific situation.