The Cares Act And Retirement Planning: Here’s What You Should Know
Required Minimum Distributions (RMDs) have been waived for 2020.
Historically, owners of retirement accounts (including IRAs, SEPs, Simple IRAs, 401(k)s, and other defined benefit plans) were legally required to start taking withdrawals by April 1 of the year after they turned 70 and ½. The CARES Act includes a provision permitting a one-year waiver in RMDs. No RMDs are required in 2020. This change in income may result in reduced estimated taxes for 2020, and Medicare payments may ultimately go down, as well. Of course, individuals who wish to take money from their retirement accounts can still do so and those funds will be taxed as they have in past years.
New coronavirus-related distribution exceptions have been enacted.
A coronavirus-related distribution is one that’s made after January 1, 2020 and before December 31, 2020 for those who are diagnosed with COVID-19 or experience adverse financial consequences caused by the coronavirus, such as being laid off, furloughed, or suffering a reduction in work hours. Up to $100,000 can be withdrawn from a retirement account, and it’s exempt from the 10% penalty tax that normally applies if the distribution is taken before age 59.5. As an additional benefit, the distribution will be automatically spread out over the next three years from a tax perspective. For many people, this will open up a large distribution amount from IRAs, which typically don’t allow for loans. As people are financially impacted by the coronavirus, they can tap into their retirement accounts without incurring penalty tax and repay it over a few years.
Charitable giving is expanded.
To encourage charitable contributions in 2020, the CARES Act increases the maximum 60% of Adjusted Gross Income (AGI) charitable contribution limit to 100% of AGI limit for the current year. Charitable contributions in excess of this amount can be carried forward for five years and are subject to the 60% of AGI limit in those years. The higher 100% of AGI limit applies to cash contributions made directly to charitable organizations, not to contributions to donor advised funds (DAFs), supporting organizations or private foundations. The purpose of these income tax provisions in the CARES Act is to encourage an immediate impact in the fight against COVID-19. For that reason, the 100% of AGI provision is limited to charitable contributions in 2020 and is unavailable for contributions to philanthropic organizations that facilitate deferred donations.
There’s a lot to consider when it comes to the CARES Act and its impact on your retirement planning.
Given the extensive changes, details and potential complexities associated with the bill, it’s important to contact your financial advisor and learn how your taxes and retirement income may be affected.
FAI’s experienced financial advisors are here with prudent guidance regarding these key aspects of the CARES Act and their impact on your broader retirement strategy. Please contact us today to discuss your specific situation.
About FAI Wealth Management, Inc.: Located in Columbia, Maryland, FAI focuses on helping clients create the financial future they desire by protecting their wealth, making the most of their assets, and planning for life’s uncertainties. The firm combines fee-only, fiduciary-driven guidance with highly personalized, consultative financial planning and investment services that enable individuals, families, and businesses to navigate complex life transitions. Founded in 1987, FAI currently manages more than $350 million in client assets nationwide. For more information about FAI Wealth Management, please visit the website at https://www.faiwealth.com or call 410.715.9200.
