What will the impacts of the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) be?

Paul Durso Finance 101, Insight Investing Articles, Investing, Investing & Planning, Life Events, Retirement

The $2 trillion dollar stimulus package was signed into law this past Friday. But what does it mean for you, specifically in regards to your retirement accounts? Let’s take a closer look at some of the CARE Act’s provisions.

RMD Waiver for 2020

For 2020, the legislation includes a waiver of required minimum distributions (RMDs). This waiver applies to company savings plans and IRAs, including both traditional and Roth inherited IRAs. Why is this important? If your account balance was much higher on December 31, 2019 than it is currently, you will now have the option to forgo your 2020 RMD and avoid the tax bill. Additionally, for those investors with a 2019 RMD start date of April 1, 2020, any 2019 RMD amount remaining and not withdrawn by January 1, 2020 is waived.

Waiver of 10% Penalty

Another provision of the CARES Act allows distributions for affected individuals of up to $100,000 in 2020 by those not yet 59 ½ years old (including those who are currently employed) without the 10% early distribution penalty from IRA’s and plans. Additionally:

  • These distributions will not be subject to mandatory withholding and because they are not eligible rollover distributions, the rollover notice is not required.
  • Unless the participant elects otherwise, the distribution will be taxed over a three-year period.
  • The distributions may be repaid to an eligible retirement plan as a rollover contribution during the three-year period following the distribution.
Company Plan Loan Changes

Under the CARES Act, plan loans taken by affected individuals have an increased maximum amount. The maximum amount of plan loans is now the lesser of $100,000 (reduced by any other outstanding loans) or 100% of the account balance. [This is an increase from the usual limit of the lesser of $50,000 (reduced by any other outstanding loans) or 50% of the account balance.] This new rule applies to loans taken within 180 days from the bill’s date of enactment. Another provision under the law could suspend loan repayments normally due between the CARES Act enactment and December 31, 2020.

Just another thought, since the market is low... Convert to a Roth

History suggests that after a substantial market downturn, even if it takes years, there will be a significant recovery. If the market does go up as in the past, and if you made a Roth IRA conversion, you will essentially be getting your Roth IRA at bargain tax rates. For example, let’s say you have a Traditional IRA that is invested in a market portfolio that, not so long ago, had a value of $133,000.  Today, after the COVID-19 impact, the value is down to $100,000. You can make a Roth IRA conversion on the $100,000 value and pay tax on that $100,000. If your portfolio rebounds to its pre-crash level, your Roth IRA is worth $133,000. You just paid tax on $100,000 and received a $133,000 tax-free Roth IRA in return.  The downside to this strategy; the conversion increases the taxable income for the conversion year.