How Does the CARES Act Impact Your Retirement Planning?

Are you aware of how the provisions in the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act impact your retirement planning? The act’s main purpose is to provide immediate financial relief to individuals, families, and businesses that face somewhat dire financial straits due to COVID-19. It pushed the federal income tax filing and payment deadline to July 15. But, it also relaxed some regulations on retirement plans to help people during this great time of need.

To help us get through these uncertain times, our government passed the CARES Act into law to help as many people as possible. From stimulus checks to mortgageThe Cares Act and Retirement Plans and student loan help and even enhanced and/or relaxed retirement plan regulations—this act is the largest of its kind in the history of the United States.

There are so many elements of this act that it may be a bit overwhelming to understand. Here are a few important explanations of how provisions in the CARES Act impact your retirement planning.

Federal Income Tax Deadline Is Extended for Everyone

As you probably know, the date to file and pay federal income tax has been delayed to July 15. Some states have pushed their due dates back, as well. But, the relief dates and some rules for filing and paying state income tax vary from state-to-state. Check with your tax professional to find out your state’s income tax filing date and make sure you comply.

We urge you not to put off organizing your income tax information until the last minute. Even if you need to delay actual filing and payment until July 15—compile your data now. When the time comes you and/or your tax professional can file your forms on time.

IRA and HSA Contribution Deadlines for 2019 Are Extended, Too

The deadline for contributions to IRAs and HSAs is aligned with the new federal income tax filing date. You have until July 15, 2020, to make contributions if you want them to count for 2019. Just make sure that you clearly designate any contributions for 2019 or they are automatically categorized for 2020.

Please note that this provision does not apply to 401(k) plans.

You Don’t Have to Take Your 2020 RMD

If you are currently taking required minimum distributions (RMDs) from your traditional, SEP, SIMPLE, or Roth IRA, you can opt not to take your RMD for 2020. This relief also applies to 401(k), 403(b), and governmental 457(b) plans, as well as to inherited IRAs.

Taking advantage of this provision is up to you. However, discuss this with your financial or tax advisor before making the move. The right strategy for you is determined by changes in your tax bracket and any losses your plan suffered on the market due to the coronavirus pandemic. For example, if you dropped into a lower tax bracket due to coronavirus, you may want to take the distribution. But, leaving money in your plan can also give it a chance to recoup some of your losses.

If you took a distribution before the CARES Act passed, you have options to take advantage of the RMD waiver. If you deposit it back into your IRA within 60 days of the withdrawal, you won’t face a tax liability. You can also deposit the money into another IRA or even convert those funds into a Roth IRA—as long as you do so inside that 60-day time frame.

Early Distributions and Loans from Retirement Plans

The following provisions for retirement plans regarding loans and distributions have requirements you must meet to take advantage of them. If you fall into either of the categories below, you’ll qualify.

  • You, your spouse, or a dependent must be diagnosed with COVID-19 or
  • You must be affected financially. So, if you lose your job due to layoffs or your company closed its doors, and/or if you lost wages due to quarantine or even to take care of your children because schools are closed—these reasons make you eligible for the relief outlined below.

Retirement Plan Early Distribution Penalty Is Waived

You can take an early distribution of up to $100,000 from your plan before December 31, 2020 and avoid the 10 percent penalty you’d normally pay for making this move. This waiver applies to all qualified retirement plans (including IRAs and solo 401(k) plans)—and is retroactive from the date the CARES Act passed (March 27) to include distributions taken from January 1, 2020. If you make a rollover distribution during this time, the tax for doing so is also waived.

You owe the income tax on that distribution even though the early withdrawal penalty is waived,. However, the government allows a three-year time frame to help you in a few ways:

  • If you deposit those funds back into your retirement plan within three years of taking the early distribution, you can avoid the tax. This repayment is not considered a contribution—so you can still make contributions up to the yearly limit your plan allows.
  • You have three years to pay taxes on the early distribution if you can’t deposit it back into your retirement plan.

It’s important to consult with a CPA regarding these transactions. The implementation of these changes can and will change over the next few months and years. We also highly recommend you consult with your individual plan custodian to find out if their policy imposes restrictions that fall outside the provisions of the government. You don’t want to violate plan-specific policies and guidelines that vary from plan-to-plan, depending on your custodian.

Retirement Plan Loan Rules Are Eased

You’ve always been able to take a loan from your retirement plan. Guidelines typically allow you to withdraw up to $50,000 or 50 percent of your vested balance. Under the CARES Act, that loan amount is $100,000 or 100 percent of your vested balance. And, the deadline to repay this is extended for one year.

Please consult with your tax advisor before deciding to take a loan from your retirement plan. Even though the economy is uncertain right now, saving for retirement is important, too. And you want to ensure you perform the transactions in the CARES Act that impact your retirement planning correctly.There are many other provisions of relief in the CARES Act you can take advantage of during this time. The more capital you can keep in your plan, the better the chances are of your plan recouping some of its losses when the market rebounds.

Additional CARES Act Provisions and IRS Information

COVID-19 stimulus check

Paycheck Protection Program for small businesses

Mortgage, foreclosure, and eviction relief

Student loan and other education provisions

Employer tax credits and other provisions

Employee relief

Filing and Payment Deadlines Questions and Answers

If you have questions or need help understanding how the CARES Act impacts your retirement planning, please contact Advanta IRA. Our clients rely on us to provide the best service available, and this means we are abreast of every situation that can impact your retirement plan. And, we are always happy to help.

About Scott Maurer

Scott Maurer, Vice President of Sales for Advanta IRA, is a recognized expert in the field of self-directed IRAs. With a law degree from the University of Florida and as a designated Certified IRA Services Professional (CISP), Scott’s keen understanding of rules and regulations fuels his passion to educate others on the power of investing in alternative assets using self-directed IRAs. Scott is a frequent guest on retirement and investing webinars and podcasts, and he has shown thousands of individuals how to achieve financial freedom by teaching them how to use their retirement funds to invest in private placements, real estate, private lending, and more. Throughout his two decades in the industry, he has watched numerous unique investments unfold, giving him great perspective of what is possible when people take control of their retirement funds and investing decisions.