The CARES Act: What Does it Mean for Your Retirement?

​On March 27, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act, which provides economic support to Americans who have been impacted by the coronavirus pandemic. You’re probably familiar with the highlights of the bill:

• Direct payments of up to $1,200 for single taxpayers making less than $75,000 and up to $2,400 for married couples making less than $150,000.1
• Enhanced unemployment insurance of an extra $600 per week for four months.1
• Forbearance options for federal mortgages and student loans.1
• A wide range of loans, grants, and other support for small businesses.1

 
Those components are important and will certainly help many people get through this unprecedented period. However, there are some other provisions that could be important for you, especially if you’re approaching retirement or are already retired.

Extended Tax Filing and IRA Deadline 

The IRS pushed back the tax filing deadline to July 15 from the traditional April 15.2 That gives you more time to prepare your return, collect documents, and possibly implement a strategy to minimize your tax bill.
 
That also gives you more time to contribute to your IRA. You can make an IRA contribution up to July 15 and count it as a deduction on your 2019 return, assuming of course that you meet income requirements.3

401(k) and IRA Distribution Options 

It’s possible that you may need additional funds to get you through this period, especially if you or your spouse have been furloughed or have lost income. The CARES Act allows you to tap into your qualified retirement accounts through special distributions.
 
You can take a withdrawal from your 401(k) and IRA without paying the 10% early distribution penalty, even if you are under age 59 ½. The distributions are taxable, but the taxes are spread over a three-year period. However, you can also repay the distribution over that three-year period and avoid paying taxes on the distribution.3
 
While a 401(k) or IRA distribution may be helpful, it could also have long-term consequences. When you take a distribution from your account, those funds are no longer invested. That means those funds can’t compound and grow. It’s possible that you may not fully participate in a market recovery if you decide to take a distribution, which could hurt your long-term growth.

Waiver of RMDs 

Are you required to take an RMD in 2020? Not anymore. The CARES Act waives all RMDs in 2020, so there is no penalty for not taking a minimum distribution from a 401(k) or IRA. 4
 
This could be very helpful for your account balance. Your RMD would have been based on your December 31, 2019. Depending on how you are allocated, your account value may have been significantly higher on that date than it is today. That means that had the RMD not been waived, you would have potentially been required to take a substantial withdrawal from an account that had fallen in value.4
 
This may be a confusing and unprecedented time, but you have options available. We are here to help you explore those options and implement a strategy for your retirement needs and goals. Contact us today at Heritage Financial North. Let’s connect and start the conversation.
 
 
1https://www.thebalance.com/2020-stimulus-coronavirus-relief-law-cares-act-4801184
2https://www.irs.gov/coronavirus
3https://www.marketwatch.com/story/this-is-how-the-2-trillion-coronavirus-stimulus-affects-retirees-and-those-who-one-day-hope-to-retire-2020-03-31
4https://www.aarp.org/money/investing/info-2020/cares-act-retiree-tax-benefit.html
 
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