On March 27th, Congress approved the COVID-19 Aid, Relief, and Economic Security Act (CARES). The Act is an effort to stimulate the economy, support businesses big and small, and provide relief to the millions of Americans who have lost their jobs due to the COVID-19 pandemic and our self-imposed shutdown. The CARES Act contains numerous provisions, ranging from providing stimulus checks to individuals and families, small business loan programs, large business bailout plans, loan relief programs, and expansion of unemployment benefits to newly eligible classes of workers. Included in the relief program are a number of retirement-related provisions aimed at helping individuals who are also affected by COVID-19. These retirement-related changes are the subject of the following short summary, written by Michael Beaulieu.
Among the most significant CARES Act changes affecting retirees are: 1) A waiver of 2020 Required Minimum Distributions (RMDs) for all retirement accounts, including inherited IRAs and workplace retirement plans; 2) Elimination of the 10% early-withdrawal penalty from retirement accounts for COVID-19 related withdrawals; 3) Extension of the tax filing deadline for individuals and businesses registered as C-corporations to July 15th, 2020; and 4) The addition of a $300 above-the-line charitable contribution deduction, which will help lower taxable income for anyone making up to a $300 cash-donation who also does not itemize their deductions.
Note: Most of the provisions below relate to individuals and their retirement accounts or tax returns. For a more complete summary of the CARES Act, please click here to view a comprehensive write-up from TaxFoundation.org.
Retirement-Related Change #1: Waiver of 2020 Required Minimum Distributions (RMDs)
Required Minimum Distributions (RMDs) are waived for the year 2020. Even if you would otherwise be subject to RMD rules this year, you are not required to take that distribution in 2020. This provision effects all retirement accounts, and includes: traditional IRAs, Roth IRAs, inherited retirement accounts, and employer provided plans including 401(k)s, 403(b)s and 457 plans.
If you are not satisfying your annual RMD through regular monthly income distributions that you need, you may consider forgoing this year’s RMD in order to reduce your 2020 taxable income. If you choose to waive taking your 2020 RMD, you will not have to take an extra distribution in 2021 or beyond. Starting in 2021, you will again be subject to the regular RMD rules, and will only be required to take that year’s RMD, and each subsequent year’s RMD going forward.
For those who are still working and / or do not need the additional income, it will generally make sense to take advantage of this provision and forgo taking a 2020 RMD, as it will save money on taxes.
Since the Act was approved in late-March, some account owners subject to RMDs may have already taken their 2020 RMD. For anyone who received their RMD on or after February 1 2020, from a non-inherited retirement account, Congress is allowing these owners to “roll” their RMD back into that retirement account, effectively avoiding having to report that distribution as part of their 2020 taxable income. This rollover must be completed before July 15th, 2020. This rule applies for regular IRAs and employer retirement plans only and does not apply to RMDs taken from beneficiary IRAs in 2020.
For some clients who would otherwise use a portion of the required distribution to make charitable contributions through a Qualified Charitable Contribution (QCD), it may make sense to consider delaying that contribution and doubling the contribution next year. If you are planning to do a QCD this year, we can discuss this at that time.
If you would like to review whether it may be beneficial to either waive your 2020 RMD, or roll your 2020 RMD back into your IRA, please call our office, and we can discuss those details further.
Retirement Related Change #2: COVID-19-Related Early Withdrawal Penalty Waiver
For those under the age of 59-½ , Congress has waived the 10% early-withdrawal penalty on COVID-19-related distributions up to $100,000 from qualified retirement accounts and IRAs. Individuals who are eligible to make these withdrawals are those who have been directly impacted by COVID-19—for example, themselves or a family member being diagnosed with the virus—or who have experienced adverse economic impact such as loss of income due to the virus.
Anyone who takes a COVID-19-related hardship withdrawal will also have the option of spreading the reportable taxable income over a three-year period, and will be allowed to “roll” back into the retirement account all or a portion of the withdrawal taken for such purposes, also over a three-year period.
On a note related to this provision, Congress also expanded the amount from $50,000 to $100,000 that an individual can take in the form of a loan from their 401k or workplace plan, and eliminated the mandatory 20% withholding on 401k and workplace retirement account withdrawals.
Although it is generally advisable to avoid taking withdrawals from retirement accounts pre-59-½ and to avoid making loans from workplace plans if at all possible, for anyone who has lost their job or has suffered reduced income due to the COVID-19, these may be considered viable options to bridge the income gap until their situation stabilizes.
Retirement-Related Provision #3: Extension of the 2019 Tax Filing Deadline and Contribution Deadline
The April 15th, 2020, tax filing deadline for individuals and C-corporations has been extended to July 15th, 2020. This extension impacts both the filing of tax returns and the payment of any federal taxes owed. The extension of this deadline is automatic, meaning no extension needs to be filed in order to be eligible to delay filing until July 15th. Colorado has also extended its own tax filing deadline. Taxes owed are due to be paid on or by July 15th, 2020, and individual returns have been granted a 6-month extension, and must be filed by October 15th, 2020.
Along with the filing deadline extension, 2019 IRA contributions and Health Savings Account (HSA) contributions can be made up until the new July 15th, 2020 tax filing deadline.
For those making quarterly estimated tax payments, both first quarter and second quarter 2020 tax estimates are due on or by July 15th, 2020. This includes those making Colorado state income tax estimated payments.
Retirement-Related Provision #4: $300 Above-the-Line Charitable Contribution Deduction
Although this is not particularly retirement-related, this will effect enough of our clients that I thought it would be worth a mention. For anyone claiming the standard deduction on their tax return, up to $300 of charitable contributions made in cash are now deductible on their tax return even without itemizing. Under prior tax law, only taxpayers who itemized were able to deduct charitable contributions. This $300 contribution will be deducted from the filer’s income before the standard deduction is applied (and is what the term “above-the-line” refers to.)
This short summary is not meant to be a comprehensive discussion of the CARES Act or its changes but should address the Act’s most important retirement-specific provisions. As we meet or review your situation, we will be cognizant of the changes brought about by the CARES Act and their impact and will be ready to discuss accordingly.