The CARES Act and How It Affects Retirees

This $2 trillion dollar package was enacted as a stimulus package to help Americans, the health care sector, and airlines during this difficult time. It not only provides all Americans with $1200, better unemployment benefits, and gives a boost to hospitals and airlines, but it also eases the situation of many retirees by eliminating early withdrawal penalties, doubling 401(k) loan thresholds, and postponing the RMD schedule. ^1,4,5,7

Stimulus Checks

As a single person, if you make $75,000 or less each year, you’ll receive a check for $1200. Couples who make $150,000 or less will receive $2400. The Head of Household limit for checks is $112,500. Individuals who are caring for young children will also receive $500 per child under the age of 17 years. Checks will be phased out by $5 for every $100 over the threshold for single individuals who make between $75,000 and $99,000 per year ($198,000 for couples and $136,500 for Head of Household filers). Those who make over $99,000 per year won’t receive a check. But meanwhile, the tax and IRA contribution deadlines have been extended in 2020. ^1,2

Unemployment

In most states, the current maximum amount of time a person can receive unemployment is 26 weeks, but the CARES Act provides an additional 13 weeks of benefits.Those who are unemployed are entitled to $600 per week in payments in addition to the normal unemployment benefits they’d receive. At the end of February the average payment was approximately $370 per week which means that many of the unemployed will receive just under $1000 each week for the first four months of unemployment. ¹

IRA/401(k) Distributions

According to the CARES Act, retirees who have an IRA (regular, Simple, SEP), an inherited IRA, a 403(b), 457(b) or 401(k) plan can withdraw up to $100,000 without the usual 10% penalty. Before, distributions taken before age 59 ½ were penalized 10% and taxed (with a few exceptions due to hardship). In order for this withdrawal to qualify as a “coronavirus-related distribution” it must fulfill one of the following criteria:
• The withdrawal must be made for an individual who was diagnosed by an approved CDC test with SRS-COV-2 or COVID-19.
• The withdrawal must be made for a spouse or a dependent who has been diagnosed with SRS-COV-2 or COVID-19 using a CDC-approved test.
• Business owners who must close or open for reduced hours due to coronavirus.
• The withdrawal must be made for a person who experiences adverse financial consequences due to being quarantined, laid off, furloughed, or having reduced work hours, or the inability to work due to a lack of child care.
• Other reasons the IRS deems OK. ^1,3,8

After withdrawal, taxes must still be paid on the amount withdrawn, but the total amount can be spread out over the course of three years. So, if you withdraw $18,000, taxes will be due on $6000 per year over the course of the following three years. The funds can be replaced without regard to contribution limits, so if you withdraw $18,000, you have three years to re-contribute it to your IRA or 401(k) even if you go over the annual contribution cap. For those who choose to re-contribute the funds they withdrew for Coronavirus-related expenses, no taxes will be due on the withdrawn funds. ¹

If you’ve already withdrawn your RMD for this year, but the withdrawal was made within the past 60 days, it is possible to re-deposit it into your account in order to avoid having it taxed as part of your gross income. However, if the distribution was taken over 60 days ago, you could consider converting it into a Roth IRA or it’s possible instead to qualify for the coronavirus-related distribution. If you go this route and call it a coronavirus-related distribution, you can still re-deposit the funds to avoid being taxed. Non-spousal beneficiaries of inherited IRA’s cannot re-deposit a withdrawal however. ^4,6

Required Minimum Distributions (RMDs)

RMDs have been suspended for 2020. Typically, RMDs are a requirement for most retirement plans once a person reaches the age of 70.5 years. The annual RMD is required until death or until the funds have been used up. Individuals who have not taken an RMD for 2019 must still do so, but all RMDs for 2020 have been waived. Normally, the first distribution is not taken until April 1 during the year when you turn 70 ½ years. ^1,4,7

The normal RMD cycle is set to start again in 2021 with the first distribution required during the year when you turn 72. If the pandemic has diminished your income enough to put you into a lower tax bracket, it might be wise to take the RMD or even a little bit more out of an IRA in 2020 to take advantage of the lower taxes. ^1,4,6,7

401(k) Loans

Normally, there is a $50,000 cap (or 50% of the vested balance in the account) on 401(k) loans, but the CARES Act increased that amount to $100,000 (or 100% of the vested balance in the account) if the 401(k) plan permits it. A 401(k) loan can be used for any purpose and there are no taxes or penalties due on the funds. Typically, borrowers are given 5 years to pay the loan back and payments are made quarterly. For those who already have a 401(k) loan, payments can be postponed for up to one year. ^1,4

Under normal circumstances, there is a 20% tax withholding for non-direct rollovers from company plans, but these have been waived for 2020. Taxes, however, must still be paid (during tax season) on any outstanding amounts that aren’t rolled back into the retirement plan within 60 days. ³

Expanded Use of HSAs

As a result of the CARES Act, high-deductible health insurance plans that are attached to a Health Saving Account (HSA) can be used to cover telehealth services even if the patient has not yet met the plan’s deductible. Co-pays or other types of cost-sharing may still be imposed after the deductible is paid. At the time of this writing, the provision is temporary and will go out of effect on December 31, 2020 unless Congress votes to extend it. ⁵

The CARES Act also allows those with an HSA, HRA (Health Reimbursement Arrangements), or FSA (Flexible Spending Accounts) to purchase over-the-counter medications and medical supplies such as surgical masks, menstrual-care products, eligible medical expenses, or drugs. These changes are permanent and will apply to HSA, HRA, or FSA purchases beginning January 1, 2020. ⁵

Should you withdraw from your retirement account?

It is not usually advisable to withdraw funds from a retirement account unless it is the last resort. Withdrawing funds early means losing tax-deferral benefits and it jeopardizes the compounding growth that’s possible when funds are left untouched for a number of years. But these are challenging times. The Coronavirus pandemic has created some unusual circumstances that may warrant the use of retirement funds. ^1,3

Deductions for Charitable Contributions

Section 2104 of the CARES Act permits eligible individuals who do not itemize deductions to deduct $300 of qualified charitable contributions as an "above-the-line" deduction, i.e., as an adjustment in determining adjusted gross income (AGI), for tax years beginning in 2020. Under new Sec. 62(a)(22), for tax years beginning in 2020, eligible individuals may deduct up to $300 in qualified charitable contributions made to qualified charitable organizations. Any amount that exceeds the $300 limit may not be carried forward to future tax years or claimed as an itemized deduction (Sec. 62(f)(2)(C)). Moreover, charitable contribution itemized deduction carryforwards arising in tax years beginning before 2020 may not be claimed as an above-the-line deduction.⁹

Citations.

1 - irafinancialgroup.com/learn-more/financial-success/cares-act/

2 - curtisfinancialplanning.com/2020/03/30/the-coronavirus-aid-relief-and-economic-security-act-stimulus-payments/

3 - curtisfinancialplanning.com/2020/03/30/care-act-review-part-ii-retirement-account-provisions/

4 - forbes.com/sites/bobcarlson/2020/03/28/ira-and-retirement-plan-changes-in-the-cares-act/#417ce26c34f5

5 - shrm.org/resourcesandtools/hr-topics/benefits/pages/how-the-cares-act-changes-health-retirement-and-student-loan-benefits.aspx

6 - usatoday.com/story/money/personalfinance/2020/04/15/coronavirus-relief-cares-act-ira-questions-answered/2984966001/

7 - forbes.com/sites/deniseappleby/2020/04/13/the-top-8-must-know-rules-for-covid-19-rmd-waivers-under-the-cares-act/#756daecad2c8

8 - msn.com/en-us/money/retirement/fact-finders-the-cares-act-allows-no-penalty-withdrawals-from-retirement-accounts/ar-BB12sr7y

9 - journalofaccountancy.com/issues/2020/sep/cares-act-charitable-deduction-for-nonitemizers.html