This year is only one third over, but it seems like it’s already been one of the longest and strangest. Recent headlines seem to point in many directions like the fact that the stock market has largely recovered despite the fact that the economic calamity of the pandemic continues or that the state is reopening even as new cases of COVID-19 continue to grow. Both monetary and fiscal policy has be brought to bear on the economic situation, and both have shown preliminary success. The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) is part of the fiscal policy. This law contains provisions that affect retirement accounts.
Between the recent market volatility, increase unemployment, and heightened safety concerns, many investors have questions about their retirement accounts. The CARES Act addresses some of those concerns. First, this law suspends required minimum distributions (RMDs) from retirement accounts, including IRAs, SEP IRAs, SIMPLE IRAs, as well as 401k, 403b, and 457 plans. The IRS requires that investors take RMDs beginning at age 72. The age for RMDs was changed just last year by another law, the SECURE Act. Because retirement accounts are tax-deferred, required minimum distributions are required so that the accounts can be taxed. The amount that you must take is determined by your age and by the account balance from the last day of the prior year. Because 2019 was a pretty good year in the market, many retirement account balances were up relative to the previous year. That changed in February, when we entered a bear market. Account owners subject to RMDs faced the dual problem of RMDs based on considerably higher values and being forced to liquidate when investments were down. Suspending RMDs addresses those issues. If you took your RMD in January, you cannot reverse it, and you will owe taxes on the distribution. If you took your RMD between February 1 and May 15, you have until July 15 to put it back into an IRA. However, investors are allowed one indirect rollover every 12 months. (Source: LPL Research)
The CARES Act also provides assistance to younger people affected by the pandemic, if you fall into at least one of two categories: First, you or your spouse is diagnosed with COVID-19. Second, you have suffered financial consequences because of the pandemic. Financial consequences could include things like being laid off, having your hours reduced, of having childcare issues. Anyone in that situation is eligible for a hardship withdrawal from an IRA, or from another plan if the plan allows it. The hardship withdrawal is not subject to the ten percent penalty but is still subject to regular income taxes. The CARES Act also mitigates the effect of the taxes, though, by allowing them to be paid over the next three years. What’s more, you can avoid the taxes altogether by recontributing the money back to the accounts over the next three years. The recontribution amount is in addition to normal contribution limits. (Source: LPL Research)
If your retirement plan allows loans, the CARES Act doubles the limit on how much of loan you can take to $100,000 or the vested plan value, whichever is less. This provision is only temporary. It is only available for the first 180 days after the CARES Act was enacted. (Source: LPL Research)
The CARES Act also includes provisions for charitable giving, including allowing taxpayers to deduct up to 100% of their adjusted gross income for cash contributions to qualified charities. The Act also allows Qualified Charitable Distributions for someone who would otherwise be subject to an RMD of up to $100,000 and have the actual amount not treated as a taxable distribution.
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