Opportunities are often created in the face of adversity and the recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act is a great example of such.
Let me summarize the 883-page Act into four actionable items that many of you might want to consider.
In the following paragraphs, I will illustrate each of four benefits and what planning strategies should be considered. Rest assured that my team and I are reviewing each of these strategies and how they might be integrated into your personal situation. We intend to reach out to everyone who we think could benefit from one or more of the following items.
So, here we go…
1 – A 2020 RMD Holiday
This rule applies to first time Required Minimum Distributions (RMD) due April 1st (held over from 2019) and any 2020 RMDs which aren’t due until December 31, 2020. This rule also applies to inherited 401(k)s and inherited IRAs.
Clients who are not living off of their RMDs (journaling them into an investment account) or those who have other means to create retirement cash flow (i.e. an investment account or substantial savings) may want to consider the holiday. This will help to reduce taxable income in 2020, opening up ROTH conversion opportunities in what is now a low marginal tax bracket. This could save sizable taxes on similar distributions in outer years.
Those who already took their RMD in 2020 and would have preferred taking advantage of the RMD Holiday can reverse the transaction. The RMD can be put back into the IRA through a process called an indirect rollover (provided you can do this within 60 days of the original distribution). Those beyond the 60-day window may still be able to reverse the transaction directly under the CARES Act (a penalty-free rollover can be completed anytime within the next three years if you satisfy the standard for a Coronavirus-Related Distribution). Note: the ‘do-over button’ does not apply to Beneficiary IRAs.
2 – Several Flexible Options to Relieve Debt Obligations
Many credit card companies are offering forgiveness, mortgage companies are foregoing interest and student loan forgiveness is also available (1-800-FED-AID). The FHA has imposed a 60-day foreclosure and eviction moratorium. Fannie Mae and Freddie Mac have been doing the same thing since March 18th.
The CARES Act also suspends required federal student loan payments through September 30, 2020, and therefore no interest will accrue on the debt. The act also excludes $5,250 from income from any employer payment made to an employee for purposes of student debt repayments.
Suspended student loan payments can be redirected to reduce higher interest credit card debt helping to improve monthly cash flow.
3 – 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 and exempts the distribution from the mandatory 20% withholding applicable on eligible distributions. Additionally, the ACT allows individuals to include income attributable to the distribution over a three-year period and allows for re-contribution of the distribution to a plan or IRA within three years. Plus, any taxes paid will be refunded on any re-contribution.
In effect, the law allows you to ‘borrow’ monies from your IRA and repay it any time up to three years later with no federal income tax consequences!
There are also no restrictions on what the money may be used for! This sounds like an interesting way to ‘bridge finance’ a real estate deal or a home improvement project.
4 – Qualified Plan Loan Provisions Liberalize
Through December 31, 2020, a 401(k)/403(b) participant can take a loan against their portfolio balance up to $100,000 or 100% of the account value. This is effectively a doubling of availability! The due date for any repayment has been delayed by an additional year (six years now instead of a five-year payback).
If needed this creates the opportunity to borrow effectively twice as much as normal at very low (historically low) interest rates.
Please Note: To be eligible for the withdrawal and loan relief (items 3 and 4), an individual must fall within one of the following categories: the individual, their 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. Provisions may be liberally interpreted!
Well, we unpacked a lot! In the next coming weeks, we will be looking for opportunities where we can put some of these strategies to work.
Be safe and be healthy.
Sincerely,
Jim Kruzan, CFP®, CRPC®
Founder and Senior Wealth Advisor, KWM
