CARES Act – What you need to know

With the passing of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress brought temporary yet widespread changes to the tax code for 2020 in order to stimulate those negatively affected by the virus. Here’s a quick summary of those changes.

Suspension of Required Minimum Distributions – that’s right, no RMD’s from IRA’s, 401(k)’s, Inherited IRA’s or other employer retirement plans (aside from certain 457 plans) for 2020. This offers a lot more flexibility to retirees when considering the most tax efficient way to take distributions. With the lower tax liability, it’s also opened the door for some IRA to Roth conversion opportunities.

Loans & Distributions from Employer Retirement Plans – The CARES Act also made it less burdensome for those seeking loans or early distributions from retirement plans. Typically, the maximum loan available from your retirement plan is the lesser of $50,000 or 50% of the vested balance. Those limitations have been increased to $100,000 or 100% of the employee’s vested balance for loans made between March 27^th and September 22^nd.

Early distributions are also impacted by the new law. The 10% early withdrawal penalty (for any distribution from a qualified plan before age 59.5) is waived on up to $100,000 of coronavirus-related distributions taken in 2020. What’s a coronavirus-related distribution? The bill describes it as any distribution by an individual for the benefit of that individual or a family member that has been diagnosed with the illness and anyone financially impacted by quarantine, furlough, or business closing. Because of the speed at which Congress was required to pass this bill, there’s some ambiguity as to what might count as a “coronavirus-related” distribution so we’d suggest discussing with your advisor when coordinating that.

Extension of Tax Filing Date – Congress announced a new tax filing deadline of July 15^th with many states following suit. Where we’re seeing biggest impact – you now have until July 15^th to make a maximum contribution to your Traditional and Roth IRA’s. If you feel comfortable with your emergency fund, we’ll always suggest filling your IRA’s up. Future you will be thankful that you did.

Qualified Charitable Distributions – While QCD’s are traditionally used to cover the required minimum distribution from and IRA, you are still allowed to make up to $100,000 of donations out of your IRA tax-free.

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