CARES Act and your Personal Financial Plan

We continue to hope and pray that you and those you love are safe and sound during this most turbulent period in the world. We also want to wish you all a blessed Easter. In the midst of all of this uncertainty, it is refreshing that not everything is unknown.

With all the efforts made by the government over the last few weeks through legislation like the Secure Act, signed into law in December of 2019, and the CARES Act[i], signed into law on March 27, 2020, there have been some significant changes in the world of personal financial planning. We thought we would summarize these changes into one email as a way to help you think about your personal planning.

Recovery Rebates

By now you have probably heard of the recovery rebates. Most individuals will receive a direct payment from the federal government. Technically, a 2020 refundable income tax credit, the rebate amount will be calculated based on 2019 tax returns filed (2018 returns in cases where a 2019 return hasn't been filed) and sent automatically via check or direct deposit to qualifying individuals. To qualify for a payment, individuals generally must have a Social Security number and must not qualify as the dependent of another individual.

The amount of the recovery rebate is $1,200 ($2,400 if married filing a joint return) plus $500 for each qualifying child under age 17. Recovery rebates are phased out for those with adjusted gross income (AGI) exceeding $75,000 ($150,000 if married filing a joint return, $112,500 for those filing as head of household). For those with AGI exceeding the threshold amount, the allowable rebate is reduced by $5 for every $100 in income over the threshold.

This calculates to any single filer who made more than $99K will not receive a stimulus check. Head of Household making over $136,500 will not receive a stimulus check. Married couples making over $198K and have no dependent children under age 17 won’t receive stimulus. Dependent children age 17-23 whose parents pay at least half their expenses will not receive stimulus, which include many college students who are still claimed as dependents by their parents.

Retirement Plan Provisions

Required minimum distributions (RMDs) from employer-sponsored retirement plans and IRAs will not apply for the 2020 calendar year; this includes any 2019 RMDs that would otherwise have to be taken in 2020.

The 10% early-distribution penalty tax that would normally apply to distributions made prior to age 59½ (unless an exception applies) is waived for retirement plan distributions of up to $100,000 relating to the coronavirus; special re-contribution rules and income inclusion rules for tax purposes apply as well.

Limits on loans from employer-sponsored retirement plans are expanded, with repayment delays provided.

Individuals born on or after July 1, 1949, can wait until age 72 to take required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans instead of starting them at age 70½ as required under previous law.[ii] This is a benefit for individuals who don't need the withdrawals for living expenses, because it postpones payment of income taxes and gives the account a longer time to pursue tax-deferred growth. As under previous law, participants may be able to delay taking withdrawals from their current employer's plan as long as they are still working.

Goodbye stretch IRA

Under previous law, non-spouse beneficiaries who inherited assets in employer plans and IRAs could "stretch" RMDs — and the tax obligations associated with them — over their lifetimes. The new law generally requires a beneficiary who is more than 10 years younger than the original account owner to liquidate the inherited account within 10 years. Exceptions include a spouse, a disabled or chronically ill individual, and a minor child. The 10-year "clock" will begin when a child reaches the age of majority (18 in most states).

This shorter distribution period could result in bigger tax bills for children and grandchildren who inherit accounts. The 10-year liquidation rule also applies to IRA trust beneficiaries, which may conflict with the reasons a trust was originally created.

In addition to revisiting beneficiary designations, you might consider how IRA dollars fit into your overall estate plan. For example, it might make sense to convert traditional IRA funds to a Roth IRA, which can be inherited tax-free (if the five-year holding period has been met). Roth IRA conversions are taxable events, but if converted amounts are spread over the next several tax years, you may benefit from lower income tax rates, which are set to expire in 2026.

Student loans

The legislation provides a six-month automatic payment suspension for any student loan held by the federal government; this six-month period ends on September 30, 2020.[iii]

Through Dec 31, 2020, employers can make tax-free contributions of up to $5250 per employee toward their student loan debt without raising the taxable income of the employee. Before the CARES Act, both employers and employees faced tax consequences of offering student loan repayment benefits. With the passage for the CARES Act, this benefit will not count as taxable income.

Again, we hope you stay safe and have a Happy Easter. As a financial services enterprise we are considered essential and to date our office is open and our staff is doing a great job of helping all of you with your continued financial requests. We have, however, temporarily suspended any face to face meetings and have elected to use video conferencing and other forms of "non-contact” communication. If you have any questions about any of the items in this email or anything, please do not hesitate to contact us.

Posted by Jeri on 4/9/2020 9:31:19 AM

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