How does the CARES Act affect your retirement accounts?

As individuals continue to deal with the impact of the novel coronavirus (COVID-19) pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act contains some retirement-related provisions to help ease the financial pain.

Required minimum distributions waived in 2020

If you are in the fortunate financial position that you do not need to access retirement account funds this year, you might benefit from the CARES Act’s required minimum distribution (RMD) relief: If you were scheduled to take an RMD this year, the CARES Act allows you to skip it.

People with traditional IRAs or 401(k) plan accounts generally must begin taking annual RMDs by April 1  following the year in which they reach age 70½ (age 72 for those who didn’t turn 70½ before January 1, 2020). RMDs are also generally required for inherited retirement accounts regardless of the heir’s age (unless the heir is the original owner’s spouse).

Skipping a 2020 RMD can be advantageous because the funds can continue growing on a tax-advantaged basis. Plus, if the values of investments in your account have declined, taking a distribution means selling shares at depressed prices — not an ideal strategy.

In addition, your RMD for 2020 is calculated based on the account’s value as of December 31, 2019. If that value has declined, the RMD will represent a larger percentage of the account’s total value than you originally anticipated. Skipping your 2020 RMD can be a great strategy for preserving the account’s value to the extent possible.

Tax relief for withdrawals

If the COVID-19 pandemic has left you in need of cash to pay expenses, the CARES Act also provides relief. It allows you to withdraw up to $100,000 on or after January 1, 2020, and before December 31, 2020, from IRAs, 401(k) plans or certain other retirement plans (if the plan allows it) on a tax-advantaged basis, even if you are under age 59½.

The law waives the 10% penalty for early withdrawals and allows you to avoid tax altogether by recontributing the withdrawn amount within three years (without regard to annual contribution limits in those years). To the extent this amount is not repaid within that time period, it is taxable, but the tax may be prorated over three years.

To qualify for this tax treatment, you must meet one of the following conditions:

1. You were diagnosed with COVID-19;
2. Your spouse or a dependent was diagnosed with COVID-19; or
3. You experienced adverse financial consequences as a result of the pandemic because you were quarantined, furloughed, laid off, had your work hours reduced, were unable to work due to lack of child care or were forced to close or reduce the hours of a business you own.

Check with your tax advisor on whether any IRS guidance on these conditions has been released that might affect your eligibility.

Increased limit on retirement plan loans

The CARES Act increases the amount you are permitted to borrow from certain qualified retirement plans from the lesser of $50,000 or 50% of your vested account balance to the lesser of $100,000 or 100% of your vested account balance. The higher limit is available for loans taken within 180 days after the March 27, 2020 enactment date.

In addition, if you had any plan loans outstanding on that date, you may delay any repayments otherwise due in 2020 for one year.

Keep in mind that retirement plans are not required to allow loans. Check with your employer on whether your plan permits them.

Strike a balance

In challenging economic times, it is important to strike a balance between meeting immediate financial needs and preserving assets for retirement. The CARES Act provisions discussed above make it easier to achieve this objective.

Feeling Charitable? Now is the Time to Give

In an economic downturn, charitable donations typically decline. If you are in a position to donate, charitable organizations need your help now more than ever. Fortunately, the Coronavirus Aid, Relief, and Economic Security (CARES) Act offers some tax incentives to support your favorite charity.

For cash gifts made to public charities in 2020, the law increases the deduction limit from 60% of adjusted gross income (AGI) to 100% of AGI. If you are considering donating appreciated stock or other assets, generally a good strategy, this year it may be preferable to sell the assets and donate the cash.

The act also creates a new “above-the-line” deduction for cash donations up to $300 by nonitemizers.

Tax break for employer student loan repayments

The CARES Act allows employees to exclude from income up to $5,250 in student loan repayments made by their employers between March 27 and December 31, 2020. It appears that there is no need to show a connection between the loan repayment and the novel coronavirus (COVID-19) pandemic.

The law also permits most borrowers to suspend monthly loan payments through September 30, 2020 without penalty.

Employers: Should you reimburse employees’ remote work expenses?

One byproduct of the COVID-19 pandemic is that more employees are working remotely than ever before. As a result, these employees may incur a variety of expenses for such items as:

• Phone and Internet services;
• Computers, monitors, tablets, printers, teleconferencing equipment, fax machines, software and other technology;
• Desks, chairs and other office furniture;
• Paper and other office supplies; and
• Electricity and other utilities.

Generally, employees cannot deduct these expenses. But their employers may be able to deduct them as business expenses if they reimburse employees. And, if reimbursement is made according to an “accountable plan,” employees need not include these amounts in their income. Be aware that under some states’ laws, employers may be required to reimburse these expenses.

For more information, contact Rob Swenson at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Tax Services.