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Financial Planning

The CARES Act's Impact on Individuals

By:

Jamie Rugg, CFP®

As a result of COVID-19 there have been a number of changes to the laws and regulations this year that could influence your financial life and strategies. Federal and local governments have also created or adjusted numerous programs that are changing the rules for 2020. While you have likely heard much about certain elements of the CARES Act related to the Payroll Protection Program, Economic Injury Disaster Loans (EIDL), as well as the Federal Reserve’s backstopping of the markets, in this adapted article from our quarterly newsletter we cover a few items that directly relate to individuals. 

Tax Filing due date pushed to July 15th

  • Applies to: Individuals, and most types of businesses, and includes quarterly estimated tax payments for the 1st  and 2nd quarters of 2020
  • Exemptions: Currently, business payroll taxes are still required, but this measure is being debated in Congress.

IRA contributions can still be made for Tax Year 2019

  • Applies to: IRAs, ROTH IRAs
  • Details: Individuals have until July 15th to make their 2019 contribution for the prior tax year

Required Minimum Distributions (RMDs) are effectively paused in 2020 for most types of accounts.

  • Applies to: Individuals over age 70 ½. Distributions that would have been required from IRAs, 401(k)s and other qualified retirement plans, including RMDs that would apply to a business owner of a 401(k) plans
  •  Excludes: Defined Benefit (DB) plans such as Cash Balance Plans, 457(b) plans, as well as previously annuitized annuities. If you have an existing DB plan the CARES ACT does not suspend your pension payments for 2020. Non-spouse beneficiaries of Inherited IRAs are not allowed to complete a rollover back into the inherited account if the RMD was already taken.
  • What if: If you already took your RMD for 2020 you can either complete a rollover to an IRA, or other allowable plan type if your withdrawal was within the last 60 days. Keep in mind that only one IRA rollover is allowed per 365 days. Or, you can pay back your account putting the money back in. However, if you have already paid taxes on those funds, it is not yet clear when and how your tax payment will be recouped.
  • Opinion: If the funds from an RMD are not essential to support current living expenses, individuals should consider not taking their RMD for the year and allowing their funds to stay invested in their account, as well as not realize the taxes in 2020. 

Removal of the 10% Early Distribution Penalty for a Coronavirus-Related Distribution (CRD)

  • Applies to: Individuals with401(k)s, 403(b)s, IRAs or Roth IRAs 
  • Details: As long as an individual meets the qualifications of having contracted, or a family member contract, COVID-19, or having a financial hardship as defined by the CARES Act because of COVID-19, a withdrawal from a qualified retirement account can be taken without the 10% early penalty. Generally, anyone under age 59 ½ cannot take a withdrawal from a qualified retirement account, except under a few narrow exemptions, without incurring a 10% penalty applied to the amount of the withdrawal. Taxes due on the withdrawal from a tax-deferred account can be delayed up to 3 years but will still need to be paid.

Coronavirus-Related Loans or Distributions from a 401(k) or other Company Sponsored plan

  • Applies to: Any worker with a vested balance in a retirement account. The amount that can be withdrawn is increased from the previous maximum of $50K, to $100K for all of 2020, or up to 100% of a participant’s vested balance, whichever is lower.
  • Details: The funds can be taken as a distribution, or as a loan against the 401(k) plan. A loan will not have to be repaid for 3 years, and if part of a 401(k) plan, the individual is still allowed to contribute to their 401(k) through payroll deferrals while the loan is still outstanding. Participants of a 401(k) plan need to confirm that their plan has adopted the hardship provisions outlined in the CARES Act for eligibility. Companies are not required to approve this provision. If an amount taken as a loan has not been repaid after 3 years, it will be considered a withdrawal and taxes will be owed on the amount of the distribution. In addition, repayment of previous loans outstanding prior to 2020, can be extended for one year.

Direct Stimulus payments to Individuals

  • Applies to: Single filers with adjusted gross income (AGI) less than $75,000, Head of household filers with AGI up to $112,500, and married couples filing jointly with AGI less than $150,000 to receive the full payment amount of $1,200 per person plus $500 for
  • Details: For AGI amounts above these limits, the stimulus check amount is reduced $5 for every $100 in income, essentially phasing out stimulus at $99,000 for single filers, $198,000 for married couples, and $136,500 for head of household filers. To see if you qualify, check line 7 on Form 1040 of your previous filed 2018, or line 8b of a recently filed 2019 tax return. Individuals need to be sure their current bank account and address are listed correctly, or have been updated, in order to receive a direct ACH deposit to their bank account, if eligible. 

Other Considerations

While none of us can say exactly what will come next related to markets, the economy, the tax code, or future changes enacted by Congress, we believe it is worth keeping in mind what could happen to taxes down the line. 

To be fair, we do not know what will occur in future years, and we cannot say we are making an accurate prediction here, but we do know our country is at historically low marginal tax rates when compared to prior decades. With the numerous current and now exacerbated fiscal pressures, declining birth rates, and expected lower slower future GDP growth, it appears difficult to imagine a scenario where taxes do not increase at some point in the future. The lower tax rate for the Tax Cuts and Jobs Act is scheduled to sunset in 2025, if not sooner depending on election results across the board in November. For many, 2020 could signal a good time to consult with your tax professional and consider possible Roth conversion strategies. For questions regarding how the CARES Act provision could impact your particular circumstances please feel welcome to contact us.

There are also a number of specific tax law changes enacted by the CARES Act and IRS amendments that apply to 2020 and recent filings. We would be happy to address these in a future article, and we encourage you to speak to your tax professional regarding how the changes could affect your tax filings.

We hope the coming months bring you continued health, prosperity (and the safe lifting of lockdowns).

The information above is provided for general informational purposes only and does not constitute financial advice. Individuals should not apply information to a specific situation and should consult their financial professional. Charlesworth & Rugg, Inc. is not responsible for any errors in or omissions to this information, or for any consequences that may result from the use of this information. © 2020 Charlesworth & Rugg, Inc.