6 Ways the CARES Act Affects Retirement Planning
#1 SUSPENDED REQUIRED MINIMUM DISTRIBUTIONS (RMD)
The CARES Act suspended all RMDs for retirement accounts in 2020, including 401(k)s, inherited retirement accounts, 403(b)s and 457(b)s. You can leave your account alone for this year and let it recover from the economic downturn. And since an RMD cannot be used for a Roth Conversion, any amount taken from a Traditional IRA can be converted to a Roth IRA this year.
#2 CHANGES FOR IRA ROLLOVERS
- If your RMD was withdrawn in multiple distributions from your IRA, you may now repay all those distributions back into your IRA as long as the repayments are made by August 31, 2020. Any re contribution of RMD funds will not count towards the one IRA-to-IRA rollover rule, which still applies to IRA rollovers outside of the RMD put back.
- Any RMD amounts that have already been withdrawn in 2020 are eligible to be rolled back into your IRA. The funds must be returned by August 31, 2020, to your IRA.
- The 60-day rollover rule doesn’t apply to Inherited IRAs, however, if the distribution would have been an RMD if not for the CARES Act RMD waiver, it can be rolled back into the inherited account as long as it is repaid by August 31, 2020.
#3 LARGER 401(K) LOANS (AND MORE TIME TO PAY THEM BACK)
Originally, 401(k) loans and other defined contribution plans allowed participants to take up $50,000 (or half their own vested balance, whichever is smaller) and pay it back over 5 years. The CARES Act will now allow you to borrow up to 100% or $100,000 (whichever is less) and allows an extra year to pay it back as long as the distribution is COVID-19 related, which you may have to prove. This applies to loans made from March 23 to September 27, 2020. The Cares Act allows the five-year period to begin in 2021, although the loan will still accrue interest in 2020.
#4 DELAYED EMPLOYER PAYMENTS INTO SOCIAL SECURITY
Self-employed individuals and employers can push off their payment of 6.2% toward Social Security for FICA taxes until December 31, 2021. They’ll pay 50% at that point, and then pay the rest on December 31, 2022. This eases up the financial pressure on employers and the self-employed, while the federal government will cover the cost of Social Security payments with general revenue. (It may also be a good time to rethink when you’ll claim Social Security if you’re nearing retirement.)
#5 EXCEPTIONS FOR CORONA VIRUS- RELATED DISTRIBUTIONS
If you or your spouse faced financial difficulties such as being diagnosed with COVID-19 or lost a job, hours, or wages, you can withdraw up to $100,000 from retirement accounts without the 10% penalty tax. This will be automatically spread out over the next 3 years and can take up to 3 years to be repaid. The opportunity will even be available if you have an IRA.
#6 CHANGES TO CHARITABLE GIVING
The CARES Act has made a few changes to charitable donations for this year:
- If you use the Standard Deduction, you can now claim a new above the-line deduction of up to $300 for in cash charitable contributions.
- If you claim charitable donations as an itemized deduction, the AGI limit for cash donations increased to 100% (from 60%) for 2020.
No matter what the future may bring, it’s always best to proactively create an informed plan.
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