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How the CARES Act Affects Retirement

You can plan for a lot of possibilities when you’re thinking about retirement, but it’s tough to plan for a global pandemic. The COVID-19 outbreak has thrown everyone for a loop. Thanks to the late-March passage of the CARES Act, we’re starting to see a path forward.

The CARES Act includes a number of provisions designed to provide some relief for current retirees and those Americans actively preparing for retirement. Containing $2 trillion in promised aid, it’s the biggest stimulus package in U.S. history. Here are just some of the ways the CARES Act might affect your retirement planning.

Deferred Required Minimum Distributions

This provision could spare retirees from significant losses this year. The CARES Act creates a one-year suspension on required minimum distributions (RMD) for 2020. If you were due to take an RMD from a retirement account later this year, you can defer that distribution to 2021. Hopefully, this additional year will give the economy, and your retirement accounts, some time to recover. 

This waiver is extended to any account owner of an eligible retirement account, including owners of inherited IRAs. Most account types that are subject to RMDs are eligible, including IRAs, 401(k), 403(b) and 457(b) accounts. Individuals don’t have to be directly affected by COVID-19 in order to forgo this year’s RMDs. Also, deferrals aren’t retroactive. Though it’s effective for RMDs made starting on January 1, 2020, this change doesn’t include an option for those who have already taken RMDs this year to return those distributions.

 Penalty-Free Withdrawals From Retirement Accounts

For anyone who develops COVID-19 or suffers financial hardship because of the coronavirus, this provision of the CARES Act could prove especially useful for short-term relief. Individuals may now withdraw up to $100,000 in distributions from retirement accounts without incurring the usual 10 percent penalty for early withdrawal. Anyone who takes advantage of this provision will also be able to spread out the tax payments on the money over three years, or take the money tax-free if it’s paid back to the account within three years. Permissible withdrawals must be related to hardships caused by the coronavirus, so this option won’t be available to everyone.

Charitable Deductions

This provision incentivizes Americans to support charities during the pandemic. To make it more cost-effective to give to charities, the CARES Act creates a new above-the-line charitable deduction of up to $300.

It’s available to people who take a standard deduction, though the Act also raises the cap on charitable contributions for taxpayers who itemize. Contributions must be made in cash, and can’t be made to donor-advised funds, in order to be eligible for this deduction.

Recovery Rebates

While it may not much affect your retirement plans, the promise of coming rebate checks is a big relief for anyone who’s struggling to make ends meet. This CARES Act provision affects any individual who earns less than $99,000 per year, or any married couple who earns less than $198,000 per year. Any U.S. resident who has a Social Security number and isn’t a dependent of another taxpayer is eligible to receive a check.

An eligible resident with an adjusted gross income of up to $75,000 ($150,000 for a married couple) will receive a refundable tax credit of $1,200 ($2,400 per married couple). Rebate amounts get gradually smaller for people earning above this threshold, and are eliminated entirely at $99,000 per individual and $198,000 per couple. There’s an additional rebate of $500 per child, though this also phases out based on income. The IRS will use 2019 and 2018 returns to determine eligibility and rebate amounts.

Tax Filing Postponement

For anyone who hadn’t yet started the process of filing their annual taxes, one of the CARES Act’s provisions provides some extra breathing room. The filing deadline for 2019 federal tax returns has been extended to July 15, 2020. Relatedly, this is also the new deadline for making an IRA contribution.

Unemployment Insurance Expansion

Due to the flood of newly-unemployed workers seeking benefits, the CARES Act extends and expands the unemployment system. More people will be deemed eligible, and benefits will be increased by $600 per recipient per week for an additional 13 weeks. That’s good news for anyone who’s currently not working and worried about dipping into retirement savings.

As we work together to get through this strange and challenging time, we’re always looking ahead to your future. Retirement planning isn’t something you can afford to put off until things are back to normal. The team at Sachetta Callahan is working from home as much as possible, and we’re always here to help you make the best possible financial decisions for your future, your family and yourself.Do you have questions about how the CARES Act will affect your retirement plans? Reach out to Sachetta Callahan now!

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