The CARES Act: Big Changes to Retirement Plans

Let’s talk retirement planning. How should retirement accounts be handled after the big changes seen in the CARES Act? The Act extended the deadline for 2019 IRA contributions, waived the required minimum distributions for 2020, and allows the use of retirement funds of up to $100,000 penalty free.

2019 IRA Contributions Deadline Extended

In an unprecedented move by the IRS and Treasury Department, the date for making 2019 IRA and Roth IRA contributions was extended alongside the federal income tax filing deadline extension. This is a surprise maneuver by the administration, where many thought there was no leeway in this deadline.

As shown throughout history, under no circumstances has a taxpayer received an extension for IRA contributions, even if the taxpayer filed for a tax filing extension. Typically, the IRA contributions for a prior year must be made by April 15 of the following year. Now, due to the federal extension, IRA and Roth IRA contributions do not have to be made until July 15, 2020.

There are many taxpayers who could use this extra time and relief. Many have lost jobs or have been forced to temporarily close their business. This extension gives people an additional three months to decide what planning strategy or alternatives may be best.

Be aware, however, if you do decide to contribute to your IRA by the July 15 deadline but after April 15, 2020, be sure to note on your contribution that funds are to be allocated for 2019, and not 2020. Even with the extension, some providers may confuse the intended year of the contribution.

Required Minimum Distributions Waived

Retirees 70 ½ and older are getting a reprieve from taking required minimum distributions (RMDs) from their retirement savings accounts in 2020. Since RMD amounts are calculated based on life expectancy and retirement account balances at the end of the previous year, these distributions would inaccurately reflect the current state of the market.

Many retirees suffered from the COVID-19-induced stock market crash, and in an effort to avoid locking in losses, retirees have the option of keeping funds in their retirement accounts and allowing their portfolios to recover over the next year.

In addition to recognizing market loss, taxable distributions could push retirees into a higher tax bracket. This provision, however, provides much-needed tax relief to those opting out of RMDs this year.

Inherited IRAs

For those taking RMDs on inherited IRAs, you may qualify for an extra year to liquify the account. The CARES Act states that if a beneficiary is subject to the five-year rule and one of those five years falls into 2020, the beneficiary receives an extra year, turning the rule into a six-year rule.

The provision also addresses other types of inherited accounts, such as an estate, charity, or trust. These non-designated beneficiaries also qualify for the RMD relief and do not have to take distributions in 2020.

2019 RMDs Not Yet Taken

If you turned 70 ½ in 2019 and delayed taking your first RMD until 2020, which under current law must be withdrawn by April 1, 2020, the RMD waiver states that you are not required to take the distribution until 2021.

Similarly, under the newly-passed SECURE Act, if you turned 72 years of age in 2020, you are also not required to start taking RMDs this year.

Undoing 2020 RMDs

It’s possible that you have already taken your 2019 or 2020 RMDs. In that case, can you undo it to save on taxes? There are a few options to consider if you’d like to put the money back into your retirement account. While we’re still awaiting IRS guidance on repayments, there are a few things we may be able to deduce.

It can be assumed that an RMD already taken this year is technically not an RMD anymore since they are waived in 2020. Under traditional regulations, an RMD is not considered an eligible rollover. In this instance, it should be eligible to be rolled back into the IRA. To be sure, retirees should consider passing the following tests as well.

Have you taken an RMD within the past 60 days? The rule of thumb is to stay within 60 days of the receipt of the funds to qualify for a rollover. If you started the new year off running and took an early RMD, you may have missed the window.

The last principle to consider is you are allowed one rollover per 365 days—either between IRA account to IRA account or Roth to Roth. If you have rolled over within the past fiscal year, you are no longer eligible to undo your RMDs this year.

Penalty-Free Early Withdrawal

The 10 percent early withdrawal penalty is waived for taxpayers who take early distributions from their individual retirement accounts. If a qualified taxpayer takes a “coronavirus-related distribution,” he or she may withdraw up to $100,000 (up from $50,000) from a qualified individual retirement account including a 401(k) plan, 403(b) plan, 457(b) plan, individual retirement account, or individual retirement annuity. The 20 percent withholding requirement on these types of distributions does not apply.

The CARES Act defines a “COVID-19-related distribution,” so please make sure your planned distribution qualifies under the statute’s requirements. The CARES Act specifies that plan administrators may rely on an employee’s certification that the employee satisfies the definition of a coronavirus-related distribution, so there will be no qualification screening from your plan administrator. You will be responsible to ensure that you meet the requirement.

Once the money is withdrawn, the amount will still be taxed, but it will be spread out over three years. If a taxpayer wishes to redeposit the funds back into their retirement account, there is the option to roll it back over within the three-year period without affecting retirement caps.

One caveat is that a coronavirus-related distribution is not considered an eligible rollover and cannot be contributed to a different retirement account when and if paid back.

Next Steps

Let’s talk retirement planning. How should retirement accounts be handled after the big changes seen in the CARES Act? The Act extended the deadline for 2019 IRA contributions, waived the required minimum distributions for 2020, and allows the use of retirement funds of up to $100,000 penalty free.

2019 IRA Contributions Deadline Extended

In an unprecedented move by the IRS and Treasury Department, the date for making 2019 IRA and Roth IRA contributions was extended alongside the federal income tax filing deadline extension. This is a surprise maneuver by the administration, where many thought there was no leeway in this deadline.

As shown throughout history, under no circumstances has a taxpayer received an extension for IRA contributions, even if the taxpayer filed for a tax filing extension. Typically, the IRA contributions for a prior year must be made by April 15 of the following year. Now, due to the federal extension, IRA and Roth IRA contributions do not have to be made until July 15, 2020.

There are many taxpayers who could use this extra time and relief. Many have lost jobs or have been forced to temporarily close their business. This extension gives people an additional three months to decide what planning strategy or alternatives may be best.

Be aware, however, if you do decide to contribute to your IRA by the July 15 deadline but after April 15, 2020, be sure to note on your contribution that funds are to be allocated for 2019, and not 2020. Even with the extension, some providers may confuse the intended year of the contribution.

Required Minimum Distributions Waived

Retirees 70 ½ and older are getting a reprieve from taking required minimum distributions (RMDs) from their retirement savings accounts in 2020. Since RMD amounts are calculated based on life expectancy and retirement account balances at the end of the previous year, these distributions would inaccurately reflect the current state of the market.

Many retirees suffered from the COVID-19-induced stock market crash, and in an effort to avoid locking in losses, retirees have the option of keeping funds in their retirement accounts and allowing their portfolios to recover over the next year.

In addition to recognizing market loss, taxable distributions could push retirees into a higher tax bracket. This provision, however, provides much-needed tax relief to those opting out of RMDs this year.

Inherited IRAs

For those taking RMDs on inherited IRAs, you may qualify for an extra year to liquify the account. The CARES Act states that if a beneficiary is subject to the five-year rule and one of those five years falls into 2020, the beneficiary receives an extra year, turning the rule into a six-year rule.

The provision also addresses other types of inherited accounts, such as an estate, charity, or trust. These non-designated beneficiaries also qualify for the RMD relief and do not have to take distributions in 2020.

2019 RMDs Not Yet Taken

If you turned 70 ½ in 2019 and delayed taking your first RMD until 2020, which under current law must be withdrawn by April 1, 2020, the RMD waiver states that you are not required to take the distribution until 2021.

Similarly, under the newly-passed SECURE Act, if you turned 72 years of age in 2020, you are also not required to start taking RMDs this year.

Undoing 2020 RMDs

It’s possible that you have already taken your 2019 or 2020 RMDs. In that case, can you undo it to save on taxes? There are a few options to consider if you’d like to put the money back into your retirement account. While we’re still awaiting IRS guidance on repayments, there are a few things we may be able to deduce.

It can be assumed that an RMD already taken this year is technically not an RMD anymore since they are waived in 2020. Under traditional regulations, an RMD is not considered an eligible rollover. In this instance, it should be eligible to be rolled back into the IRA. To be sure, retirees should consider passing the following tests as well.

Have you taken an RMD within the past 60 days? The rule of thumb is to stay within 60 days of the receipt of the funds to qualify for a rollover. If you started the new year off running and took an early RMD, you may have missed the window.

The last principle to consider is you are allowed one rollover per 365 days—either between IRA account to IRA account or Roth to Roth. If you have rolled over within the past fiscal year, you are no longer eligible to undo your RMDs this year.

Penalty-Free Early Withdrawal

The 10 percent early withdrawal penalty is waived for taxpayers who take early distributions from their individual retirement accounts. If a qualified taxpayer takes a “coronavirus-related distribution,” he or she may withdraw up to $100,000 (up from $50,000) from a qualified individual retirement account including a 401(k) plan, 403(b) plan, 457(b) plan, individual retirement account, or individual retirement annuity. The 20 percent withholding requirement on these types of distributions does not apply.

The CARES Act defines a “COVID-19-related distribution,” so please make sure your planned distribution qualifies under the statute’s requirements. The CARES Act specifies that plan administrators may rely on an employee’s certification that the employee satisfies the definition of a coronavirus-related distribution, so there will be no qualification screening from your plan administrator. You will be responsible to ensure that you meet the requirement.

Once the money is withdrawn, the amount will still be taxed, but it will be spread out over three years. If a taxpayer wishes to redeposit the funds back into their retirement account, there is the option to roll it back over within the three-year period without affecting retirement caps.

One caveat is that a coronavirus-related distribution is not considered an eligible rollover and cannot be contributed to a different retirement account when and if paid back.

Next Steps

If you are in retirement or nearing it within a few years, please contact me at kdmaher@bpw.com or (805) 963-7811 to discuss proactive withdrawal strategies to optimize your retirement years.