Your post-CARES Act Guide

Published 9:11 am Wednesday, September 30, 2020

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Signed into law on March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act offered an estimated $2 trillion in fiscal stimulus to help individuals and businesses cope with the economic impact of COVID-19. But what effects could this legis¬lation have on your year-end planning? More than you may think, starting with your retirement savings.

If you’re among those with required minimum distributions (RMDs), perhaps the biggest impact of the CARES Act was the waiver of RMDs for the 2020 tax year, which also pertained to inherited and beneficiary-qualified account holders. Do keep in mind, however, that while this means you do not have to take an RMD at all this year, your future RMDs could be slightly higher as a result.

The CARES Act also gives you until December 31, 2020, to withdraw up to $100,000 in what’s called coronavirus-related distributions (CRDs) if you or another qualified individual expe¬rienced a financial hardship (e.g., healthcare expenses, layoffs or furloughs) due to COVID-19.

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While CRDs aren’t subject to the IRS’s mandatory 20% with¬holding fee and are exempt from the 10% early distribution penalty tax, it’s important to note that doesn’t waive your potential tax liability.

Fortunately, you have options. For instance, you can elect to have your CRDs taxed in 2020 or rat¬ably over a three-year period. You can also repay all (or even a portion) of your CRDs to an eligible retirement plan within the three-year limit and file an amended tax return to receive a refund on any taxes you already paid. And if you’re worried about exceeding your plans’ annual contributions limits, there’s more good news: These re-contributions, which are considered a tax-free rollover, won’t count against you.

When it comes to the CARES Act’s impact on your retirement planning, there are crucial caveats to keep in mind. If you had already withdrawn your 2020 RMD prior to the legislation going into effect, for instance, you cannot now repay your plan. Additionally, if you think you’ll end up in a lower tax bracket for 2020, you may still want to withdraw your distributions. You may also want to consider converting your assets from a tradi¬tional IRA to a Roth IRA – since you don’t have to satisfy the RMD requirement that normally accompanies these conversions.

All things considered, you may be unsure if now’s the right time to convert your assets to a Roth IRA. While you’ll certainly want to discuss the matter with your advisor and tax profes¬sional, you might conclude that the answer is a resounding yes. That’s because converting when your retirement account values are low helps diminish your potential tax impact. Another worthy consideration? You’ll have to pay income tax on whatever amount you convert – and income tax rates are set to increase after December 31, 2025, when the Tax Cuts and Jobs Act expires.

True to its acronym, the CARES Act also included temporary provisions to promote charitable giving and provide additional gifting opportunities. If you itemize your charitable cash contri¬butions, for example, the act allows you to deduct up to 100% of your adjusted gross income (AGI), instead of the usual 60%. Even if you don’t itemize, the CARES Act still works in your favor with an above-the-line deduction for cash contributions up to $300. So no matter how you go about it, prioritizing philan-thropy under the CARES Act is sure to be a win/win.

As you prepare for year-end and the upcoming tax year:
• Speak with your advisor to determine whether to skip or withdraw this year’s RMDs.
• If you need to take a distribution from a qualified plan, your advisor can help you determine the best options.
• Consider if now’s the best time to convert from a traditional to a Roth IRA.
• Maximize your impact by reviewing your charitable giving plans under the CARES Act.
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as financial advisors of Raymond James, we are not quali¬fied to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Stephen P. Poitevint, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.