CARES Act Highlights
This has certainly been a very busy and tumultuous few weeks. Many economists and finance gurus’ opinions vary greatly from we may have a mild recession for just a couple of quarters, to deep recession, or possible depression. The truth is nobody knows. A lot depends on how long the current lockdown lasts, if we have a 2nd cycle in the fall, and how soon effective immunity can be built up in the population. One piece of positive news, causing a 2-day uptick in the markets, is Congress signing off on the CARES Act. I’ll explore more on that in a bit.
Since the pandemic started, the market has taken a deep dive and then did an attempt at recovery with a couple positive days this past week. And then, boom, down again on Friday. I want to remind you that we are not out of this crisis yet. There are still significant challenges in our economy as a result of the pandemic – non-essential small businesses are closed, and unemployment claims were 3.3 million in just the week between March 15 and March 21 .
It’s too early to say that we’re at the bottom because I don’t know and neither does anyone else. I do know that markets dislike uncertainty. Therefore, whether we are at rock bottom or not, volatility is the new normal. We must be prepared for it.
Now more than ever, it’s good to remember the late John Bogle’s famous quote.
When the market’s going up, we think it’s going to go up forever. When the market goes down, we think it’s going to go down forever. Neither of those things actually happen.
– John Bogle, Vanguard Founder
Meanwhile, yesterday the government signed a $2 trillion economic stimulus package, the largest economic package in history. Dubbed the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, the intention is to provide relief to those most affected by the pandemic. 5 key provisions of the 890-page bill include:
- Direct Payment to Taxpayers
- Coronavirus-Related Distributions from IRA’s and Employer-sponsored Retirement Plans
- Loans from Employer-sponsored Retirement Plans
- RMD’s Waived in 2020
- Relief for Student Loan Borrowers
The remainder of this article will cover these 5 key provisions of the CARES Act. There is much more than that, but I believe these provisions will pertain to about 95% of my client situations from a financial planning perspective. There are many other tax provisions and provisions for business owners that are out of scope for this article.
CARES Act: Help from the Government
- Direct Payment to Taxpayers
Individuals who had up to $75,000 in adjusted gross income in 2019 will receive a one-time payment of $1,200, while married couples with AGI up to $150,000 will get $2,400. Additionally, taxpayers will receive an additional $500 for each qualified child, up to age 17.
Where individual and family income exceed the above thresholds, payments are reduced by $50 for every $1,000 in AGI.
I see 2 flaws in this. One is if you recently got laid off but exceeded the 2019 income threshold, you will not get a check. In this scenario, you need the extra cash, but you don’t qualify. You would ultimately benefit from the Recovery Rebate in April of 2021, or whenever you file your 2020 return, but that doesn’t help you right away.
A 2nd flaw is the scenario of being under the 2019 income threshold, you get a check, AND you’re still working through the pandemic. Do you really need or deserve a check? Some people’s income may actually rise during the crisis. A scenario: if you (single) made $60k in 2019, you will get a check, even if your income rises to $80k in 2020.
I’m not sure if the government will be addressing these unintended consequences or not, but we’ll keep an eye on the announcements!
- Coronavirus-Related Distributions distributions of up to $100,000, made from IRAs, employer-sponsored retirement plans, or a combination both, which are made in 2020 by an individual who has been impacted by the Coronavirus because they:
- Have been diagnosed with COVID-19
- Have a spouse or dependent who has been diagnosed with COVID-19
- Experience adverse financial consequences as a result of being quarantined, furloughed, being laid off, or having work hours reduced because of the disease
- Are unable to work because they lack childcare as a result of the disease
- Own a business that has closed or operate under reduced hours because of the disease
- Meet some other reason that the IRS decides to say is OK
A number of potential tax benefits associated with the Coronavirus-Related Distributions include:
- Exempt From the 10% Penalty – Individuals under the age of 59 ½ may access retirement funds without the normal penalty that would otherwise apply.
- Not Subject to Mandatory Withholding Requirements – Typically, eligible rollover distributions from employer-sponsored retirement plans are subject to mandatory Federal withholding of at least 20%. Coronavirus-Related Distributions, however, are exempt from this requirement. Plans can rely on a participant’s self-certification that they meet the requirements of a Coronavirus-Related Distribution when processing a distribution without mandatory withholding.
- Eligible to be Repaid Over 3 Years – Beginning on the day after an individual receives a Coronavirus-Related Distribution, they have up to three years to roll all or any portion of the distribution back into a retirement account. Furthermore, such repayment can be made via a single rollover, or multiple partial rollovers made during the three-year period. Finally, if distributions are rolled using this option, an amended return can (and should) be filed to claim a refund of any tax paid attributable to the rolled over amount.
- Income May Be Spread Over 3 Years – By default, the income from a Coronavirus-Related Distribution is split evenly over 2020, 2021, and 2022. A taxpayer can, however, elect to include all of the income from a Coronavirus-Related Distribution in their 2020 income.
- Loans from Employee-Sponsored Retirement Plans. Many employer-sponsored retirement plans, such as 401(k)s and 403(b)s, offer participants the option of taking a loan of a portion of their retirement assets. For individuals who have been impacted by the coronavirus (same criteria as in #2), the CARES act enhances your Plan loan rules in 3 ways:
- Maximum Loan Amount is Increased to $100,000 – In general, the maximum amount that may be borrowed from an employer plan is $50,000. The CARES Act doubles this amount for affected individuals.
- 100% of the Vested Balance May Be Used – In general, once an individual has a vested plan balance that exceeds $20,000, they are only eligible to take a loan of up to 50% of that amount (up to the normal maximum of $50,000). The CARES Act amends this rule for affected individuals, allowing them to take a loan equal to their vested plan balance, dollar-for-dollar, up to the $100,000 maximum amount.
- Delay of Payments for up to 1 year
- RMD’s are Waived in 2020
The CARES Act suspends Required Minimum Distributions (RMDs) during 2020. The relief provided by this provision is broad and applies to Traditional IRAs, SEP IRAs, and SIMPLE IRAs, as well as 401(k), 403(b), and Governmental 457(b) plans. Furthermore, the relief applies to both retirement account owners, themselves, as well as to beneficiaries taking stretch distributions.
An interesting scenario: Individuals who turned 70 ½ in 2019, but did not take their first RMD in 2019 and were planning to take 2 RMD’s in 2020, do not have to take either of those RMD’s in 2020! This is one scenario where procrastinators benefit!
(Normally, if you had turned 70 ½ in 2019, you have until April 1st, 2020 to take the 1st RMD but would be required to take a second RMD by the end of 2020).
A common question is: “How does the CARES Act ‘RMD waivers’ apply to the new 10-Year Rule imposed by the SECURE Act” (requiring non-eligible beneficiaries to take full distribution within 10 years). The answer is, “No Waiver”. The no waiver is because there is no need for a waiver. 2020 is the first year that an individual could die and have a beneficiary subject to the 10-Year Rule. And the 10-Year Rule does not actually begin until the year after the year of death. Therefore, 2020 doesn’t count as a waiver for purposes of the 10-Year Rule.
- Relief for Student Loan Borrowers. Federal student loan required payments may be suspended through September 30, 2020. During this time, no interest will accrue on this debt. Voluntary payments may continue. By default, payments will continue unless individuals take proactive measures to contact their loan provider and pause payments.
This period of time will continue to count towards any loan forgiveness programs. As such, any student borrower who intends to qualify for a program that will ultimately forgive the entirety of their Federal student debt (such as via the Public Service Loan Forgiveness program) should contact your Advisor or Tax Specialist about pausing payments.
What We Are Doing to Help
This week, I announced two things that may help:
- If you are laid off or one of the many experiencing economic hardship, I’m offering No-charge / No-obligation office hours in 30-minute blocks to address your personal situation. Private and confidential. No shame. I’ve been through this myself and you can read about it at Meet Mike Kastler Financial Advisor
- No-charge use of our financial planning software for some basic functions like a financial dashboard, budgeting, and setting goals. It may be just what you need to figure out where you’re at, especially now. You can read more about it and start your financial planning journey as a do-it-yourselfer here: Financial Planning Software
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