The recently-passed $2.2 trillion CARES Act is packed with provisions aimed at providing much-needed relief to individuals and small businesses who have been negatively impacted by COVID-19. This article highlights those provisions that we believe are relevant and most likely to have a direct impact on our clients’ financial situations.
Required minimum distributions (RMDs) have been suspended for 2020
This applies to all RMDs from qualified defined contribution plans, such as IRAs, 401(k)s, 403(b)s and IRAs.
If you have not taken your RMD yet in 2020 but need the funds to cover upcoming expenses, you may want to consider drawing the funds from a more tax-efficient source, such as a non-retirement (taxable) account. You will typically pay less federal income tax on a draw from a taxable account than a retirement account, but this can vary based on your overall situation so it’s best to consult with your financial or tax advisor.
If you already took your RMD
- You may be able to put it back.
- One potential option for this is to complete a rollover if it’s been 60 days or less from the time you took the distribution AND you haven’t completed a rollover in the last 365 days (non-spouse inherited IRAs do not qualify for this).
- If you don’t meet the requirements in the first option, you still might be able to put the funds back as a result of a provision dealing with “Special Coronavirus Distributions.” This is detailed below in the section entitled “if you plan to repay.”
- You can do a Roth conversion – you will still have to pay the tax on the distribution, but these funds will now grow tax free and no longer be subject to RMDs.
The IRS has issued further guidance on the RMD provisions of the CARES Act, providing greater flexibility for those looking to return an unwanted RMD. The 60-day rule mentioned in the original post has been extended for IRA distributions taken between Feb 1, 2020 and May 15, 2020. The extension allows you to return distributions taken during this time period up until July 15, 2020 if you haven’t completed a rollover in the past 365 days preceding the date of the distribution.
The extension also allows you to complete a Roth conversion by July 15 with distributions taken between February 1 and May 15. This could be a good option if you don’t qualify to put the funds back because of the one rollover per year rule or if you would simply prefer to convert the funds to Roth rather than put them back.
As of this writing, distributions taken from your retirement account in January and distributions taken from a non-spousal inherited IRA still cannot be returned, but this could potentially change in the months to come as the IRS continues to evaluate the situation and provide us with additional guidance.
If you were impacted by COVID-19 you have the ability to borrow or withdraw up to $100,000 from your retirement accounts in 2020 without incurring the 10% penalty, regardless of your age. To qualify you must meet one of the following conditions:
- You, your spouse or dependent was diagnosed with COVID-19.
- You have experienced adverse financial consequences as a result of being quarantined, furloughed, laid-off or had a reduction in work hours.
- You are unable to work due to lack of childcare.
- You own or operate a business and have been forced to close or reduce hours.
- Or you have experienced an adverse financial consequence that the IRS deems acceptable. (This seems to be a “catch-all” to make this provision available to virtually all individuals, but we hope to get more guidance from the IRS soon to confirm.)
If you plan to repay – You can do so over a three-year period that starts the day after you receive your distribution. This is the alternative option to put back an RMD distribution if you don’t qualify for the first option previously mentioned.
If you do not plan to repay – You can claim the full amount of the distribution in your 2020 income or you can spread it evenly over 2020, 2021 and 2022. There are pros and cons to each option, so it’s best to consult with your CPA to determine what makes the most sense for your specific situation.
For those individuals looking for immediate relief on their cash flows, you may be able to defer your mortgage and student loan payments.
If you are experiencing a financial hardship due to COVID-19 and have a federally-backed mortgage, you can potentially qualify for a mortgage forbearance. A forbearance will essentially pause or reduce your mortgage payment for a limited period of time. You have the right to request a forbearance for 180 days and then can ask for a 180-day extension if you are still unable to make your payments. During this period, you will not be charged any fees, incur penalties, and it will not affect your credit score, but regular interest will still accrue.
It is very important to work closely with your lender to make sure that you understand the details of the forbearance so that there are not any surprises once your forbearance period is over. Through this process, the lender will help you understand how the terms of your mortgage will be impacted. In most cases you should simply be able to pick up where you left off with your monthly payments once the forbearance period is over. The payment amount should remain the same as it had always been and the missed payments added to the end of the loan, but these are key details that you need to confirm with the lender.
If you do qualify and go into forbearance, it’s important to remember that you will still need to set aside the funds for your homeowners’ insurance and real estate taxes if those payments are typically included with your mortgage payment.
Student Loan Payment Deferral
All federally backed student loan payments can be put on hold until September 30, 2020. During this time period, no interest will accrue, and no penalties will be charged. Once the deferral period is over, you will go back to making your regular payments and the missed payments will be added to the end of the loan.
Your payments may automatically be put on hold, but you will need to confirm this with your lender. If this is the case and you want to continue making payments despite the option to defer, you will need to contact your lender to let them know.
If you have private student loans, it’s best to reach out to the lender to see if they are offering similar options.
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