What You Should Care to Know About the CARES Act

The outbreak of COVID-19 has brought about the signing into law of the CARES Act (Coronavirus Aid, Relief and Economic Security Act) last March 27, 2020. 

More than just a massive stimulus package, the CARES Act provides relief that includes special distribution, rollover and loan rules for retirement accounts.

We summarize below the key takeaways of the law that you should care to know about:

Extended Deadlines

  • The tax-filing deadline for 2019 federal income tax returns has been extended from April 15 to July 15, 2020.
  • The 2019 deadline for IRA and Roth IRA contributions has also been extended to July 15, 2020.

Waived RMDs

Required Minimum Distributions (RMDs) for 2020 have been waived under the CARES Act.  What does this apply to?   

  • 2019 RMDs due by April 1, 2020 (if delayed to January 1, 2020 or later)
  • 2020 RMDs from company plans and IRAs
  • 2020 RMDs for plan, IRA and Roth IRA beneficiaries

Additionally, any 2019 RMD that has not yet been withdrawn by January 1, 2020 is also waived.  This applies to those who reached age 70 ½ in 2019 and had a required beginning date of April 1, 2020.  If you had already taken your 2020 RMD, this can still be undone if they are eligible to be rolled over.  You can do Roth conversions and company plan rollovers to IRAs without first taking an RMD in 2020.

To be eligible:

  • Must be within 60 days.
  • There must not have been an IRA-to-IRA or Roth IRA-to-Roth IRA rollover in the 12 months preceding receipt of the 2020 RMD.  Planning option: If the distribution is still within the 60 days, but there was an IRA-to-IRA rollover within the preceding 12 months, then a Roth conversion is possible. (Roth conversions don’t count for the once-per-year rule.)
  • Non-spouse beneficiaries cannot undo RMDs already taken.  Voluntary distribution options: RMDs are “minimums” only
  • Roth conversions
  • QCDs (qualified charitable distributions) The QCD age is still 70 ½, even though the SECURE Act raised the RMD age to 72.

Roth IRA Conversion Strategy

Do you have after-tax contributions in a qualified plan?  Now may be the time to consider converting those after-tax amounts to a Roth IRA tax-free. 

Why is a Roth conversion a good deal when the market is down?  It is worth noting that your tax bill will be based on the value of the traditional IRA assets at the time they are converted to a Roth IRA.  So, when you convert when values are low, you reap the benefits of tax-free earnings later when the market goes on the upswing. 

Because of the CARES Act, you can convert all or a portion of your traditional IRA to a Roth without concern about taking your RMD prior to the transaction in 2020.  The RMD is not eligible for conversion in a normal year.

It is a great idea to convert what would have been your 2020 RMD for people who were already budgeting for the taxes due on the RMD.  The same amount of taxes will be generated on aRoth conversion anyway. But instead of the withdrawal being paid to you, it is now in a Roth IRA growing tax-free. Moreover, there are no lifetime RMDs on Roth IRAs, so a Roth conversion can help reduce future RMDs. 

Coronavirus-Related Distributions (CRDs)

In any other given year, you will usually pay 10% in penalties if you access funds in your retirement account if you are under the age of 59 ½.  But under the CARES Act, “qualified individuals” can take up to $100,000 of penalty-free IRA and company plan distributions during 2020.  The coronavirus disaster declaration exception waives this 10% penalty on premature distributions up to $100,000 from qualified plans – such as 401(k) or 403(b) – and IRAs for qualifying taxpayers. 

The withdrawal is still taxable at regular ordinary income rates.  However, the taxable amount from an early distribution is subject to taxes over three years, instead of just the 2020 tax year.  The law also allows the distributions to be repaid to IRAs or plans.

The exception applies to “qualified individuals” as follows:

  • Those diagnosed with the SARS-CoV-2 or COVID-19 virus by a test approved by the CDC; 
  • Those whose spouse or dependent is diagnosed; and
  • Those who experience “adverse financial consequences” from:

1. Being quarantined;

2. Being furloughed or laid off or having work hours reduced;

3. Being unable to work due to lack of childcare; or

4. Closing or reducing hours of a business owned or operated by the individual. The law gives the Secretary of the Treasury the authority to expand this definition.

Affected individuals who are over age 59 ½ (not subject to the 10% penalty) can still take advantage of the three-year income tax deferral and payback.

Repayments

CRD withdrawals can be repaid by qualified individualswithin three years to a retirement account, tax free. The three-year period begins on the day after the date the funds were received. Individuals can make one or more repayments during the three years, but repayments cannot exceed the amount that was distributed. The repayments can be made to any retirement plan to which the original distribution could have been rolled over and does not have to be made to the account from which the CRD originated.

No taxable event is considered to have occurred when CRDs are repaid, and the once per-year rollover rule will not apply. If an individual has already paid income tax on his distribution and then later recontributes the funds to a retirement plan, he will be able to file an amended tax return to recover the taxes paid.

While those over age 59½ will not benefit from the 10% penalty relief, the ability to spread income from CRDs over three years and repay those distributions may prove helpful.

Plan Loans

If your company plan offers loans and you are eligible to take a CRD, you might consider taking a loan in addition to (or instead of) a CRD. For those who qualify, the CARES Act offers two plan loan relief provisions:

  • For affected individuals, the maximum amount of plan loans is increased to the lesser of $100,000 (reduced by other outstanding loans) or 100% of the account balance. [Normally, the lesser of $50,000 (reduced by other loans) or 50% of the account balance.] This relief applies to loans taken by September 23, 2020.
  • Loan repayments for qualified individuals normally due between March 27, 2020, and December 31, 2020, may be suspended for one year. 
  • Loans are not allowed from IRAs.

We can help you navigate through these new laws and provisions.  Give us a call and we’ll tailor a plan for your personal circumstances.

Vora Financial Team

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