The COVID-19 pandemic has caused a ripple of fear and anguish through the United States and globally. While we grapple with the health implications and stay at home to help flatten the curve, the government is doing everything in its power to not just help the medical implications of the virus but also the economic implications as well. 

Last week over 3 million people filed for unemployment. A recent study by the Federal Reserve Bank of St Louis projected as many as 47 million Americans will potentially be laid off in Q2 of 2020, which would put America at over 30% unemployment. To put this into perspective, in February we sat at 3.5% unemployment and the Great Depression had an unemployment rate of 25%. Washington DC needed to act swiftly to help curb the financial implications of this virus.  

The $2.2+ trillion CARES Act has a lot of implications for all parts of the economy; the purpose of this specific article is to focus on how it affects pre-retirees and those who take RMDs. (We will address how it affects business owners and younger generations in future articles.) 

 

Coronavirus-Related Distributions:

The CARES Act aims to help Americans access their money in a dire time of need. One of the many ways the government aims to do this is through “Coronavirus–Related Distributions” out of qualified accounts. Here’s what you should know:

• You can distribute up to $100k from an IRA or employer-sponsored plan penalty free even if you’re under age 59 ½.
• The distribution, while taxable, can be repaid over a 3-year If money is rolled back into the plan an amended return would help you claim a refund on the taxes you paid for this amount.
• While the distribution can occur immediately, the income can be spread over a 3-year period.

There are stipulations on who can claim coronavirus distributions, but the rules make it appear it will be liberally applied and not enforced very aggressively when you file your 2020 taxes. Some of the rules that let you take one of these distributions are: 

• You have been diagnosed with COVID-19.
• You have a spouse or dependent who has been diagnosed with COVID-19
• You’ve experienced adverse financial consequences as a result of being quarantined, furloughed, being laid off, or having work hours reduced.
• You are unable to work because lack of childcare.
• You own a business that has closed or is operating under reduced hours because of COVID-19.
• You meet other criteria that the IRS has deemed acceptable.

As you can see, by the time this ends a very large number of Americans will fall into this category. While Congress’ purpose is to relieve some of the stress in peoples’ lives, there is a planning opportunity available in 2020 related to these distributions as the income taxes can be spread over a 3-year period and what amount isn’t used is eligible to be rolled back into the plan. 

 

RMDs:

It’s been a crazy year for Required Minimum Distributions (RMDs). First, RMDs were pushed from 70 ½ to age 72 under the SECURE Act and now they have been waived for the year 2020 under the CARES Act.  

For those retirees with large pre-tax accounts that are forced to take RMDs above what they need for cost of living, this can be a big tax savings for them. Even if you already took your RMD for 2020, you have 60 days to roll it back into your retirement account. 

 

Inherited IRA RMDs:

Unfortunately, the RMDs for inherited IRAs aren’t quite as forgiving. The only benefit given to inherited IRAs is if you are considered a “non-designated beneficiary” such as a charity, estate, etc. Normally, if the decedent had not started taking their RMDs before their passing then they must be taken over a 5-year period. For non-designated beneficiaries already in the middle of the 5-year distribution, 2020 is now “waived” and essentially turned the 5-year rule into a 6-year rule! 

Don’t get this confused with the new specifications under the SECURE Act which requires Non-Eligible Designated Beneficiaries to distribute the account over a 10-year period. While this waiving of the 5-year rule is nice, it will not help the vast majority of inherited IRA beneficiaries. 

 

Conclusion:

At Denver Private Wealth Management, it’s our goal to keep our clients and community updated on the ever-changing landscape of wealth management. Each new bill, bull market or bear market brings new ideas and insights that we must adapt to. By researching and staying up-to-date on the latest trends we can do what’s best for our clients and help them grow and protect their wealth as our mission states.