From Our Partners at PAI: The CARES (Coronavirus Aid, Relief, and Economic Security) Act has been a topic of discussion for weeks as legislators discussed the best way to give Americans a much-needed boost as the economy has faltered due to the Coronavirus. Signed into law in late March, there are several provisions that will help students, workers, and retirement plan participants to maintain more financial stability during this challenging time.
CARES Act changes retirement plan provisions for loans and tax-advantaged withdrawals
Retirees and workers alike have likely been groaning when looking at stock values over the last several weeks. While it takes some time for market volatility to level out, these provisions included in the CARES Act may provide retirement plan participants with additional flexibility and more options for loans and penalty-free withdrawals during this stressful time.
PENALTY-FREE WITHDRAWALS FROM RETIREMENT PLANS
Workers who are experiencing financial difficulty due to the effects of COVID-19 on their careers, health, and overall financial wellness will be able to take a penalty-free distribution from a retirement account, like a 401(k) or IRA, between January 1, 2020, and December 31, 2020.
Under normal circumstances, there is a 10 percent penalty tax added to the taxes paid on distributions from a retirement plan before a participant reaches age 59 1/2. However, the CARES Act includes a provision that allows eligible participants to take up to a $100,000 distribution from a retirement account without the addition of the 10 percent tax that normally accompanies an early withdrawal. This tax-favored withdrawal may be repaid to an eligible retirement plan within three years of taking the distribution, with the option to repay beyond the normal annual contribution limits.
Eligible participants for a coronavirus-related distribution are those who have been diagnosed with the virus (or have a spouse or dependent diagnosed), experience adverse financial consequences as a result of being quarantined, unable to work, laid off, or those who had work hours reduced due to the virus.
TEMPORARILY INCREASED LIMIT ON RETIREMENT PLAN LOANS
The CARES Act is also temporarily increasing eligible retirement plan loan limits to $100,000 or 100 percent
of a participant’s vested balance, whichever is lesser. Including current outstanding loans, the Act will provide a one-year extension to the loan repayment deadline if the loan is due between the date of the Act’s enactment and December 31, 2020.
*Plans may not be required to incorporate the loan limit increases, so participants with questions should consult their plan sponsor or plan administrator to learn more.
Suspension of Required Minimum Distributions
Under normal circumstances, retired plan participants age 70.5 (or age 72, depending on whether you were born on or after July 1, 1949) and older are required to take distributions from their retirement plan based on the value of their accounts at the end of the previous year. With the volatility in the stock market in recent months, many retirees are faced with a decreased total value of their accounts and have concerns about RMDs not being responsive to their loss of value. As a response, the CARES Act includes a provision allowing plans to suspend making RMDs in 2020. A similar suspension of RMDs was allowed in 2009, following the 2008 financial crisis.
Additional Coronavirus relief for workers and business owners
While retirement accounts have certainly taken a hit during the recent episode of volatility, there are many other aspects of American life and the economy that have been impacted by COVID-19. The following legislation may be helpful for workers and business owners looking for more ways to make ends meet in 2020.
DIRECT PAYMENTS TO AMERICANS
The CARES Act includes stimulus checks for Americans, with or without jobs, and those who are currently living off Social Security payments. The one-time payment will be up to $1,200 per person, with married couples receiving up to $2,400 with an additional $500 per child under the age of 17. Eligibility is based on income, with assistance decreasing for those who make more than $75,000 annually, stopping with individuals making more than $99,000 and couples making more than $198,000 jointly. The payments are planned to be sent sometime before December 31, 2020 with a more specific date range to be determined.
DELAYED TAX FILING DEADLINE
Under normal circumstances, the deadline for filing federal income taxes is April 15, but the IRS has extended the deadline to file your 2019 federal taxes to July, 15, 2020. Taxpayers can also defer their income tax payments due on April 15 until July 15, 2020 without penalties or interest, regardless of the amount they owe. The new deadline and the optional deferment is available for all taxpayers, including trusts and estates, corporations, and other non-corporate tax filers.
DELAY IN STUDENT LOAN PAYMENTS FOR SIX MONTHS
The CARES Act includes a provision for those with student debt to defer payments without accruing additional interest for six months, or until September 30, 2020. Student loan borrowers who may otherwise have been unable to make payments due to financial hardship as a result of the Coronavirus can delay making payments, but must request the deferment option from their loan provider.
Separate from the CARES Act, Americans may be interested in an additional withdrawal option available thanks to recent SECURE Act provisions:
SECURE ACT BIRTH AND ADOPTION PROVISION
The SECURE Act, passed at the end of last year, included provisions designed to help families who are struggling with costs associated with the addition of a child to the household. During challenging times like the COVID-19 pandemic, retirement plan participants may consider taking advantage of the penalty-free withdrawal option from an IRA or 401(k), totaling up to $5,000 per parent per child.
For more information about the changes to tax filing due dates and other provisions included in the CARES Act, visit Congress.gov to read the bill in its entirety. It’s also important to note that the new legislation allows retirement plans to adopt these new rules immediately. If the plan does not currently allow for loans or hardship distributions, they can amend the plan by the last day of the first plan year, beginning on or after January 1, 2020, or later pending additional guidance. For any questions, PAi suggests reaching out to a financial advisor or tax professional.
One of my favorite Wall Street quotes regarding volatility is from Mark Twain, who said: “October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”
To some, the buying and selling of a company’s stock by corporate executive officers and directors can be an indicator of Wall Street sentiment. In July 2020, the ratio of companies with executive buying compared with executive selling touched 0.27 – the lowest level in nearly 20 years.1
Want to give your child or grandchild a great financial start? A Roth IRA might be a choice to consider. There are many reasons why starting a Roth IRA for a teenager may be a sound financial strategy. Read on to learn more about how doing this may benefit both of you.
In March, the Coronavirus Aid, Relief, and Economic Security (CARES) Act became law. It was designed to help Americans impacted by the COVID-19 pandemic.1 The new law offered investors a financial break. It gave people the option to skip required minimum distributions (RMDs) from traditional Individual Retirement Accounts (IRAs) and 401(k)-style plans in 2020. (Original … Continue reading “The I.R.S. Has Enhanced the 2020 RMD Waivers”
Lately, it can feel like each day brings a new headline about fluctuating market behavior. But amid the ups and downs of 2020, there may be some potential good news on the horizon. On July 16, 2020, the interest rate for 30-year home loans have fallen to 2.98%. In addition, the average interest rate for … Continue reading “30 Year Home Loans Fall to Historic Lows”
Epic Capital provides the following comprehensive financial planning and investment management services: Learn More >