IRA Financial’s Adam Bergman discusses certain provisions of the CARES Act that deal with IRAs, including contributions, distributions and RMDs.
In his latest podcast (from home), Mr. Bergman discusses your IRA and the CARES Act. As you probably know, President Trump signed the CARES Act into law on March 27, 2020. This $2 trillion stimulus package is designed to help everyone affected both physically and financially from COVID-19, the coronavirus. The Act boosts unemployment benefits and will send out checks to every American who needs it. Further, it will help small businesses and vital industries, such as hospitals, health care providers and airlines.
For many Americans, the Act also eases restrictions on retirement plan funds. The focus of this podcast is the IRA, or Individual Retirement Account. You now have access to the funds that have been previously blocked by tax penalties and other laws. Mr. Bergman details how you can use you IRA funds if you are in dire need of them. Remember, dipping into your IRA should be a last resort. Only withdraw funds if you have no other choice. That money (and other assets) are earmarked for your golden years. Do your best to only take what you absolutely need right now.
IRA and the CARES Act
The three major provisions of the CARES Act that deals with the IRA are distribution rules, contributions and required minimum distributions (RMD). Let’s discuss each in detail.
Normally, IRA distributions are penalized if taken before age 59 1/2. Due to the CARES Act, there will be no penalty for hardship distributions. If you or your spouse has contracted the virus OR you have been financially affected by it, you are eligible for a distribution. This is great news for younger savers. The 10% early withdrawal penalty is there to ensure your IRA funds remain in the account until you are older. However, due to the financial crisis, the penalty has been waived so you can get to your funds easier.
Again, it’s important to only withdraw those funds if you need them. If at all possible, you should ride out the storm and leave your IRA funds intact. The CARES Act also gives some relief as to the taxes due. Remember all traditional distributions are taxed when taken. Further, all Roth IRA distributions before age 59 1/2 will have taxes due on the earnings (contributions are always tax free). The CARES Act will allow you to pay taxes over the next three years. You will not get hit with a huge tax bill in 2021 if you take a large distribution this year. You may choose to spread those taxes over several years.
Arguably the most important provision for IRAs due to the CARES Act are the contribution rules. Normally, there’s an annual limit to the amount you may contribute to your IRA. For 2020, that limit is $6,000 or $7,000 if you are at least age 50. But, if you take a hardship distribution from you IRA, you may choose to re-contribute the entire amount, no matter how large. Therefore, the annual limits will not apply if you repay the money withdrawn from the plan.
The biggest thing the CARES Act allows is the ability to repay your distribution. This is because ZERO taxes will be due if you put the entire amount of funds you withdrew back into the IRA (or other retirement plan). Therefore if you withdrawn $10,000 and re-contribute the amount, you owe no taxes or penalties. If you re-contribute $5,000, you will owe taxes on the $5,000 you kept. Essentially, this allows you to take a loan from your IRA, which is normally against the rules.
One last thing to note that came prior to the Act was that the IRS pushed back Tax Day until July 15. This also allows you to contribute to IRA for the 2019 tax year until that time. So, if you have some money laying around, it may be a good idea to get it into your IRA if you didn’t max your 2019 contribution.
The last important thing for IRA and the CARES Act are the RMD requirement. During normal years, once you reach age 72, you must start withdrawing from your traditional IRA. It doesn’t matter if you need the funds or not, you are required to do so. The IRS wants their cut with the taxes that must be paid. However, the RMD requirements have been waived for 2020. No one has to withdraw funds from his or her IRA (or other retirement plans).
This is good news since RMD amounts are based on the IRA value as of December 31 of the previous year. Obviously, the markets and other asset classes have taken a dive since then. Your RMD amount will be much a higher percentage of your current balance than during normal years.
One last note is that if you have not taken your RMD due for 2019, you must satisfy that amount. This will generally apply to those who turned age 70 1/2 last year. That was the old required beginning date until the SECURE Act moved the RMD age to 72. You generally have until April 1 of the following year to take your first RMD. Therefore, if you have not done so, you must take it by July 2020. However, like all others, you will not have an RMD for the 2019 tax year.
The CARES Act will help tens of thousands (or more) of Americans utilize retirement savings during this time. Granting us easier access to those funds is a great gesture by the government. Many people do not have the cash on hand to get through these difficult times. Be wary though. Only take what you absolutely need and try to repay any amount withdrawn with the next three years to avoid a tax hit!
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Did You Know?
IRA Financial can help you plan for retirement in these turbulent times of pandemic and economic volatility. Reach out to us today to get started on a Solo 401(k) or Self-Directed IRA. By investing in alternative assets you can protect yourself against market swings, and enjoy more stability. Some clients invest in cryptocurrency, real estate, and more.