On March 27th, 2020 President Trump signed the CARES Act. As is the norm for typical legislation, the Act is over 800 pages long. Trying to develop an understanding of the entire Act is more than the typical investor is probably prepared to attempt. This podcast breaks down the major points of the Act that are relevant to our investors, whether you are in retirement or preparing yourself to retire down the road.
The major provisions of the Act are:
- Direct payments of $1,200 to individuals ($2,400 to couples), plus an additional $500 per dependent child under age 17, for individuals earning less than $75,000 ($150,000 for couples).
- Increased and extended unemployment benefits
- More than $375 billion in grants and loans for small businesses
- Up to $500 billion in aid for larger businesses
- $150 billion for state and municipalities
- $180 billion for hospitals and other public heath purposes
- Easing IRA distribution rules including:
- Early withdrawal penalty for early (before age 59 ½) withdrawals from IRAs and employer sponsored plans
- Increase, to $100,000 or 100% of account balance, the maximum employer sponsored plan loan
- 20% mandatory federal withholding on employer sponsored plan distributions is suspended
- Allow a distribution, up to $100,000, to be paid back to the retirement plan within three years with no taxes due
- Allow taxes on distributions, not paid back, to be spread over three years
- Required Minimum Distributions are suspended for 2020
In order to take advantage of the early distribution and loan provisions you must have a valid COVID-19 related reason. These include:
- Being diagnosed with COVID-19
- Having a spouse or dependent diagnosed with COVID-19
- Experiencing a layoff, furlough, reduction in hours, or inability to work due to COVID-19 or lack of childcare because of COVID-19
In addition to meeting one, or more, of the conditions above your employer sponsored plan must be able to play ball. The changes to the regulations only tell you what you CAN do IF your retirement plan allows for the changes. Most employers are moving quickly to update their plans, but you should first clear any action with your employer before trying any of these strategies.
While all of these options can provide relief in some circumstances, there are still tax consequences that you need to understand before taking advantage of any of these provisions. Annual tax planning is something that everyone should do, it is even more important this year due to changes in income that most of us will experience.
This podcast breaks down each of these points in more detail, but also makes you aware of the short and long-term tax consequences of accessing any of the provisions in the CARES Act.