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CARES Act and Retirement Planning Rule Changes

July 09, 2020

Wondering how the CARES Act will impact your retirement accounts? Some notable changes to required minimum distributions, 401(k)s and more have been introduced.

Are you up to speed on retirement plan changes under the Coronavirus Aid, Relief and Economic Security (CARES) Act? You’ll want to read up on changes that could impact your individual retirement account contributions, required minimum distributions and more.

CARES Act changes

  1. Traditional and Roth IRA contribution deadlines pushed to 7/15/20. This year only!

  2. Self-employed plans – SEP, Defined Benefit Plans, Solo 401ks – contribute until the earlier of return is filed or 10/15

  3. RMDs waived for 2020
    -Great because RMD is calculated based on 12/31/19 account balance which is likely much higher than it is now
    -Includes 2019 RMDs for those who turned 70 ½ in 2019 and would need to take their first RMD by 4/15/20
  4. 10% early withdrawal penalty waived on up to $100k of 2020 distributions for individuals affected by COVID-19
  5. Coronavirus Related Distributions (CRD)
    -Still taxable but can spread the tax evenly over the next 3 years
    -Could also repay the withdrawals back over the next 3 years to eliminate the tax hit
    -May be eligible if: you, spouse, or dependent is diagnosed with COVID-19 or you experience adverse financial consequences due to COVID-19 as a result of furlough, layoff, reduction in work hours, inability to work due to lack of child care, closing/reduced hours of the business you own or operate, or “other reasons identified by the Treasury”
    -Logistics - If you take several CRDs tax consequence applies separately to each withdrawal
    -Examples: Take $100k withdrawal from Traditional IRA in 2020, fully taxable as ordinary income unless you have basis from nondeductible contributions.
    -Report the $100k equally over 3 years (2020, 2021, 2022). $33,333 in each year. After re-contributing the entire $100k in 2023 (before 3 year window closes) you would file amended returns for 2020, 2021, and 2022 to remove the $33,333 of income in each year.
    -Recontribute early in 2021 or 2022 – only filing amended returns for years amount was outstanding.
    -Report all withdrawal income on 2020 return – if repaid in 3 year window then you are only amending 2020. It may make sense to report all income in 2020 if other taxable income is lower because of COVID-19.
  6. 401k loans – increased to $100k max (from $50k) – only applies to loans taken within 180 days of the enactment of the bill
    -Repayments due in 2020 can be extended for up to one year – We recommend you check with your account custodian first before taking any loan.
  7. Roth Conversions
    -No change under the stimulus bills but this could be a great planning technique to convert now when values are depressed and thus pay less tax on conversion
    -As always, we can also take distributions from a Roth IRA up to the basis from nondeductible contributions.

Other recent changes

Stretch IRAs eliminated

Previously if you named anyone other than a spouse as the beneficiary of your IRA, the beneficiary could choose to take distributions over their lifetime and to pass what is left onto future generations (called the "stretch" option). The RMD’s were calculated based on the beneficiary’s life expectancy.

The SECURE Act requires non-spouse beneficiaries of an IRA to withdraw all the funds in the IRA within 10 years of the IRA holder’s death. In many cases, these withdrawals could take place during the beneficiary’s highest tax years, meaning the elimination of the stretch IRA is effectively a tax increase on many Americans.

Some things to note:

  • Effective to those who inherit IRAs starting on January 1, 2020.
  • Planning techniques
  • Consider converting to Roth. Pay the tax now and beneficiaries still need to take over 10 years but they won’t be hit with the tax burden in the future at potentially higher rates
  • Consider withdrawing account now, pay the tax and use the proceeds to buy life insurance which would be tax free to beneficiaries. Consult with KLR Wealth or your wealth manager before taking this step.
  • Estate planning – for those using stretch IRAs as a part of their estate plan to pass assets to 2nd and 3rd gens, could consider naming a trust as the beneficiary but that’s not a catch all answer.

529 Plans

Up to $10k in lifetime withdrawals can be used on qualified student loans. Give this one some serious thought with all of the talk of eliminating student loan debt!

Questions? Contact our Private Client Services Team

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