CARES Act

Vincent Fishbaugh |
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Information
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IRA's
RMD's

3 April 2020

Informational -- No response or action is required.

Bottom line:

  • RMD’s due for 2020 are waived.
  • Investors younger than 59 ½ can take money from their 401(k) without the 10% early withdrawal penalty.

While most people and the media have focused on the stimulus checks that individuals may receive under the recently passed Coronavirus Aid, Relief, and Economic Security Act (CARES), there are little-noticed provisions included that cover retirement accounts. Here are some of the details.

  • Required Minimum Distributions (RMD) are suspended for 2020.

Congress has provided relief allowing all RMD’s due in 2020 to be waived. You do not have to take them.

For some, this is great news. Since the 2020 RMD is based on the December 31, 2019 account value and the market is much lower since then, you will not be compelled to take money during this decline.

However, others may ask; Is it beneficial to take the withdrawal even if you no longer are required to do so?

Obviously, if you need to use the money for current expenses, go ahead and take what you need. There are no rules to follow this year.

For others, it may be a wise strategy to take it now if your tax bracket is low and you expect that it might be higher in the future.

One strategy is to do a Roth Conversion. You cannot convert RMD’s to a Roth IRA but now that the RMD is eliminated you may want to explore doing a Roth conversion at what may be a relatively low tax cost. For retirees there may be additional benefits.

  • Any amount converted removes the money from your current IRA thereby lowering the balance that would be subjected to future RMD’s. Depending on investment performance in the IRA, this may lower your income and taxes in future years. Lowering your income could also lower the tax due on your Social Security benefits and possibly lower any Medicare surcharges.
  • The monies converted to the Roth IRA are no longer subject to RMD’s. The money grows tax free and qualified withdrawals of the amount converted are tax free. Note, earnings from the amount converted are subject to a 5-year rule.
  • Converting while the market is down means that any future gains from a rebound will be tax-free when finally withdrawn while gains in the IRA would be subject to taxes when taken out.

The key factors to consider are whether you can pay the taxes due on the amount converted from other monies and whether you expect tax rates to be higher in the future.

Roth conversion cannot be undone! You need to consult with your tax advisor before undertaking this strategy.

  • Penalty-free withdrawals from your retirement plan.

       The CARES Act waives the 10 percent penalty for IRA’s and Defined Contribution plans for individuals experiencing financial hardship.

While it is never a good idea to withdraw money early, people who are in financial trouble may need this in an emergency.

Coronavirus related distributions may be taken for the following reasons:

  • You, your spouse or a dependent has been diagnosed with coronavirus.\
  • You are experiencing negative financial consequences as result of being quarantined, laid-off or furloughed, or your work hours have been reduced.
  • You are unable to work due to a lack of available child care.
  • You’ve had to close or reduce the hours of a business due to coronavirus restrictions.

Withdrawals of up to $100,000 in 2020 would be exempt from the early withdrawal penalty. The money would still be subject to taxes. However, you have up to three years to pay the taxes due on the withdrawals. You also have three years to repay any of the withdrawals if you choose to do so, and the repayments will not be counted against any actual contributions you make.

  • Retirement plan loan amount is doubled.

If you have a retirement plan that allows you to take loans you can now take up to $100,000, double the previous $50,000 maximum limit. Loan payments can be deferred for a year.

Again, I highly urge you to consult a tax expert before implementing any of the above strategies mentioned. While I am not a tax professional, I am happy to discuss the details of these ideas with you.