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What the CARES Act Means for You

We have all watched with bated breath as the Senate and House debated and then finally passed the 883-page CARES Act. This legislation is in addition to tax relief legislation contained in the Families First Coronavirus Response Act also recently passed. Since plenty has been written already about what is in the legislation, I will focus here on relief for individuals and small businesses.

  1. RMD (Required Minimum Distribution) holiday and strategies

If you are subject to RMDs that are not part of a defined benefit plan, you have the option to skip them for 2020. This rule applies to first time RMDs due April 1 (held over from 2019) and to 2020 RMDs that aren’t due until December 31. The RMD reprieve also applies to inherited 401(k)s and inherited IRAs.

Many people need their RMDs to live off of, but it is estimated that about 20% of people do not need their RMDs for current income. If this applies to you, why withdraw RMDs off of accounts that are down significantly (and RMDs that are calculated on elevated December 2019 values, no less).

Instead of taking the RMD, look at sources of cash reserves until the market bounces back, hopefully later in the year.

But what if you already took your distribution in 2020? Those RMDs can still be put back into an IRA in what is called an indirect rollover, provided you do so within 60 days and haven’t made any other indirect rollovers in the past year (and don’t intend to do so with any of their IRAs in the next year). If the 60-day rollover period has expired, then under the CARES Act, a penalty-free rollover can still be completed anytime for the next three years from the date the distribution was received assuming you can satisfy the very liberal standard for a Coronavirus Related Distribution).

And although there is an RMD holiday for beneficiary IRAs, be careful as these strategies to replace already taken RMDs discussed in the previous paragraph don’t seem to apply to RMDs already taken from beneficiary IRAs. Subtle distinction here.

Action items: Think about  your RMDs strategically. Perhaps stop the systematic distribution if you don’t need those payments.

  1. You have options when seeking relief from debt obligations

If you are experiencing a cash crunch assess your options. Many credit card companies are offering forgiveness, mortgage companies are foregoing interest, student loan forgiveness is available (1-800-4-FED-AID), and clients could take a loan against their investment accounts.

The FHA has imposed a 60-day foreclosure and eviction moratorium for single family homeowners with FHA insured mortgages. In a similar move, Fannie Mae and Freddie Mac are suspending foreclosures and evictions for at least 60 days as of March 18. Again, check with your lender.

The CARES Act suspends required federal student loan payments through September 30, 2020 and therefore no interest will accrue on the debt. The act also excludes up to $5,250 from income from any employer payment made to an employee before January 1, 2021 for purposes of student debt payments.

You can see that there is plenty going on here between the stimulus benefits and private efforts, so take the time to research every debt to understand your options. It is better to do your research now than to make late payments or default when other options are only a phone call away.

Action items: Do your research and exhaust all options in connection with mortgages, student loans, other lenders and credit card companies.

  1. Penalty-free withdrawals from qualified retirement plans and IRAs

The CARES Act provides tax relief for retirement plan and IRA “coronavirus-related distributions” up to $100,000 taken by individuals on or after January 1, 2020 and before December 31, 2020. The CARES Act permits in-service distributions, provides an exception to the 10% early distribution penalty, exempts the distribution from the mandatory 20% withholding applicable to eligible rollover distributions, allows the individual to include income attributable to the distribution over a three-year period and allows for the recontribution of the distribution to a plan or IRA within three years (and taxes already paid can get refunded).

Distributions will be included in gross income over three years (although you can proactively elect to include all income in 2020, which may make sense for some people), but taxes will be spread over a three-year period. Distributions also may be recontributed within three years of withdrawal and then your client can file an amended return to obtain the refund of any taxes paid. In effect, the law allows you to borrow up to $100,000 from your IRA (or any combination of IRAs) and repay the amount anytime up to three years later with no federal income tax consequences.

And there are no limitations on what you can use the funds for. You can use the money to pay bills, help your adult children, pay down your loans or whatever you like and then repay the money within the next three years. You could even technically take that money and invest it in the stock market, although you would need to consider whether that

  1. Qualified plan loan provisions are also liberalized

The CARES Act also liberalizes qualified plan loan provisions. Through December 31, 2020, consider taking a loan from a qualified plan up to the lesser of $100,000 or 100% of the vested account balance (they doubled the allowable amount). The due date for any repayment of the loan is delayed for an additional year (normally five years).

Action items: Consider whether a $100,000 loan from a qualified plan makes sense given the relaxed terms.

A final note regarding eligibility

To be eligible for the withdrawal and loan relief provided in the CARES Act, an individual must fall within one of the following categories: the individual, her spouse or dependent is diagnosed with COVID-19, or the individual experiences adverse financial consequences as a result of COVID-19, as certified by the employee to the plan administrator. It seems that these provisions will be liberally interpreted.

The CARES Act is providing plenty of financial relief. The availability of funds from retirement plans presents a huge opportunity for those in need of cash, but it also creates plenty of confusion. If you would like to discuss your personal options, please don’t hesitate to contact me, (714) 465-3167.