Many Americans are worried about
both their physical and financial health amidst the economic fallout of the
COVID-19 pandemic, but relief is on the way for many. On March 27, 2020, the Coronavirus
Aid, Relief and Economic Security (or CARES) Act, the largest economic aid
package in modern American history, took effect. Now and in the coming months
the CARES Act should ease some of the current hardships Americans at all income
levels are facing.
One of the largest provisions of
the CARES Act has set aside $269 billion in relief payments to taxpayers with
an annual income of up to $75,000 ($150,000 for married couples); they will receive
checks of up to $1,200 per person; $2,400 for married couples; plus $500 per
dependent child. Additional relief will also come in the form of enhanced
unemployment benefits, student loan forgiveness, and accessibility to
retirement plan distributions, under certain conditions.
Under the legislation, investors may
have access to higher-than-normal distributions and/or loan amounts from IRA
and 401(k) accounts. If individuals have taken a loan from one of those
retirement accounts, they can now receive extensions on repayment of that loan
for up to one year. If you are an investor or small business owner who needs
some liquidity due to hardship, the CARES Act may provide temporary relief.
For those of you with income
levels above the $150,000 threshold, the CARES Act includes provisions that may
allow you to access retirement savings if you are experiencing adverse
financial consequences related to the corona virus outbreak. We provide an
overview of these CARES Act provisions below, but note that corporate
retirement plans, such as 401(k)s, are not required to adopt them. Each plan
will differ, so check with your plan administrator or employee benefits manager
to determine which options may be available through your company's plan. Note
than many plan administrators are still assessing how to incorporate these
options into their corporate plans.
We also encourage investors to
carefully consider all other options before tapping into retirement savings.
Keep in mind that retirement funds are set aside for a specific purpose and
will be needed at a future date. Withdrawing retirement savings now may require
liquidating investments at low values and potentially creates a tax obligation.
Your B. Riley Wealth financial advisor is prepared to help you evaluate the
options and repercussions with your overall financial well-being in mind.
Additional Time for IRA
Contributions (2019)
In case you haven't heard, Tax
Day is now July 15, 2020; not April 15. What does that mean for your IRAs
and Roth IRAs? You now have until July 15, 2020 to make 2019 contributions to
those accounts. If you are dealing with hardship, you now have a little extra
time to contribute to those accounts. However, if you are able to contribute
the maximum amounts now, doing so earlier might allow your investment to grow
more rapidly if markets improve in the coming quarter. Make sure you monitor any contributions you make
to IRAs after April 15 and between July 15 and discuss them with your financial
advisor, so they are credited to the correct year: 2019 and not 2020.
Required
Minimum Distribution (RMD) Rules Suspended for 2020
Investors who turned 70 ½ by
December 31, 2019, are normally required to start taking minimum distribution
amounts out of their retirement plans, known as RMDs, or Required Minimum
Distributions, every year. Under the CARES Act, this RMD is waived for 2020 for
IRA, 401 (k), 403(b) and 457(b) plans.
This is important to note,
because RMD amounts are calculated using the balance of one's retirement
account on December 31 of the prior year. Since those values are based
on the equity markets at that time, it means individuals would be required to
take an RMD based on much higher account values. That would leave many investors taking out a
higher percentage of their current IRA and paying a "disproportionate amount"
of taxes, according to American Retirement Association.
Given the rapid decline in equity
markets that has occurred between December
31, 2019 and March
27, 2020, the day the CARES Act was signed into law, it may make sense for
to forgo your RMD in 2020 if you don't need liquidity now. Leaving the funds invested
will allow time for the market to stabilize, and you can thus avoid taking an
RMD at what would likely be a loss in 2020.
Broadly speaking, retirement plan participants
can get a waiver on their RMD:
·
If they have previously taken ongoing RMDs, they
will not be required to receive an RMD in the year 2020;
·
Investors who turned 70 ½ in 2019 but didn't
take their first-ever RMD on or before January 1, 2020 can forfeit receiving
their RMD's for both 2019 and 2020;
·
Beneficiaries who are currently receiving life
expectancy payments are not required to take a 2020 beneficiary RMD;
·
If an individual has taken their RMD for 2020 within
the last 60 days, they can now roll the amount back into the same plan with
no penalty or income tax due on the distribution, as long as they have not
made any IRA-to-IRA or Roth IRA-to-Roth IRA rollovers over the past 12 months.
Caveats on RMDs: The
guidelines governing RMDs are quite complex, particularly with respect to the
impacts of temporary relief provided under the CARES Act. You are encouraged to
consult with your tax professional for additional guidance.
IRA Beneficiaries Subject to A
Five-Year Payout Rule
If you are a "non-designated"
beneficiary of an IRA inherited in 2015 or later, you may be subject to a
five-year payout rule if you inherited the account from someone who died before
reaching age 70 ½. That means that by 2020, the balance remaining would have to
be liquidated. Under the CARES Act, you have the option to extend the
distribution for a full year, meaning, you wouldn't have to take a required
distribution until December 31, 2021.
Hardship Distributions
If you are dealing with a major
financial hardship at the moment, the CARES Act allows certain
coronavirus-related distributions from retirement accounts like 401(k)s and IRAs
until December 31, 2020. Dependent upon
the provisions of your company's plan, you may be able to take a COVID hardship
distribution of up to $100,000 and the tax liability can be spread over three
years, if so desired.
These COVID hardship
distributions are available to individuals age 59 ½ or younger under
the following conditions:
·
You, your spouse, or a dependent has been
diagnosed with COVID-19;
·
You have experienced adverse financial
consequences as a result of being quarantined, laid off, furloughed, given
reduced work hours, or are unable to work due to a lack of childcare;
·
You are a business owner who has had to reduce operating
hours or close your business;
·
Possible additional factors as determined by the
Treasury Secretary
Under normal circumstances,
anyone under the age of 59 ½ would be penalized at a 10% early withdrawal
penalty rate, but under the CARES Act, it is waived as long as a distribution
is taken by December 31, 2020.
It's important to note that you will
have three years to repay the amount withdrawn back into qualified retirement
plans and IRAs without incurring income tax on the distribution, plus, the
amount repaid will not be subject to contribution limits normally
imposed. If you are unable to re-contribute the amount within that three-year
period, you will owe income tax on it; however, the distribution can be
reported as taxable income evenly over the years 2020, 2021, and 2022.
You should check with your
retirement plan administrator or your employee benefits department to find out
if your plan allows for hardship distributions for COVID-19 related reasons.
Additionally, consider the tax liability that will occur if you are not able to
repay the amount to your plan account.
Loans from Qualified
Retirement Plans
Loans against a 401(k) or other
qualified retirement plan are impacted, too. If you already have a plan loan
outstanding with an amount due, you may be able to delay that loan
repayment for up to one year through December 31, 2020. Also, if your
retirement plan allows for loans, limits may have been increased to as much as $100,000
or the lesser amount of 100% of an individual's vested account balance
as allowed under the CARES Act.
If you are an investor that needs
liquidity, first check with your retirement plan administrator or your employee
benefits department to determine whether a loan is an option for you. Then
discuss the advantages and drawbacks of a plan loan vs. a hardship withdrawal
with your financial advisor.
Need more information? Your
financial advisor stands ready to assist you as you navigate these uncertain
times. If you have any questions, please do not hesitate to call your B. Riley Wealth Management financial
advisor.
B. Riley Wealth Management does not provide tax or legal
advice. Consult with your tax or legal professional. The preceding is an overview
compilation of CARES Act information available at the time of publication and
does not address all aspects of the CARES Act provisions. For complete details,
visit: www.congress.gov or www.treasury.gov.