The CARES Act
The CARES Act and its impact on retirement plan distributions
HOW QUICKLY THINGS CAN CHANGE. Last month, we were discussing the new SECURE Act and the impact it had on many of our members and their families. Due to the coronavirus pandemic, the recently passed CARES Act has made additional changes that our members need to be aware of.
First and foremost, we hope that you and your family are well and staying safe from the spread of the novel coronavirus. Here at the Home Office, we are taking every precaution as outlined by the CDC and local authorities to ensure that our employees are in a safe work environment.
If you are still in quarantine, now might be the perfect time to pull out your insurance certificates, give them a good review and make sure that your beneficiaries are up to date.
With the kids all schooling from home, maybe this is a good time to consider starting them off on their own insurance plan as well. You can purchase our $20,000 Juvenile Term Plan for your children or grandchildren from ages 0 to 21 for the same low price–just $25 per year–regardless of their age. Call your WPA agent if you need any additional information. Although we are working remotely and social-distancing, we are still able to process applications.
Now, let’s talk about the CARES Act and how it may impact our members.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress and signed into law by President Trump on March 27, 2020. The intention of the CARES Act is to provide fast and direct assistance for American workers, families and small businesses. The vastness of the CARES act is beyond the scope of this month’s article, so I will focus attention on the most pressing items that may impact our membership in the immediate future.
RMD relief & what it means to you
First, the CARES Act essentially suspended all required minimum distributions (or RMDs) from qualified retirement plans (such as IRAs and 401ks) for the year 2020.
The SECURE Act announced in December 2019 pushed the minimum age for required minimum distributions back to age 72 (from 70 ½).
Why does skipping your RMD this year matter? Because many Americans are struggling financially in 2020 because of the pandemic, and the CARES Act gives them more flexibility on distributions. Leaving your RMD intact this year might make sense if you don’t need the income. Skipping your RMD this year will increase the value of your account and give you more income for future years.
If you still need or want to take your RMD, nothing has changed and you don’t need to do anything. Your RMD will be processed as usual.
The impact on RMDs from inherited IRAs
What if your RMD is from an inherited IRA? Does the CARES Act address these distributions?
Yes. The bill suggests that the relief pertains to any RMD from any individual retirement plan, which should include inherited IRAs or 401ks.
Now, let’s say that you’ll be inheriting an IRA from a parent who passed away earlier this year. Will the new 10-year rule established in the SECURE Act apply to you this year?
Yes and no. The answer depends on whether or not the original account owner (i.e., your parent) was subject to RMD rules at the time of death. The 10-year period starts in the year after the death of the account owner. So, if your parent passed away in January 2020 and left their IRA to you as an adult child, the 10-year rule will start in 2021, not 2020. As beneficiary, you will have until the end of the 10th year to withdraw the entire account balance. However, if the original account owner was already subject to RMDs, a distribution would need to be taken in the year of death as if the owner was still alive. In this case, the CARES Act enables the beneficiary to suspend the RMD, and you would not have to take the RMD for 2020.
Options for those who already took their 2020 RMD
Some of you may have already taken your RMD for 2020. What are your options?
Unfortunately, if you took your RMD earlier in the year, you may be out of luck. As of now, there is no provision to redeposit your RMD back into your account, (other than the 60-day rollover provision discussed below), and your distribution will be taxable for the year 2020.
If you are on a monthly RMD withdrawal plan and wish to suspend your withdrawals, you’ll need to write or call your custodian to have the distributions suspended. You may also be able to “roll over” any distributions that you received in the last 60 days as a qualified rollover. You are only allowed to do one rollover per year and it must be made within 60 days of receiving the original distribution.
Stopping your annual RMD
What you need to do to stop your annual RMD for 2020 depends on who your custodian is. Here at WPA, we are requesting that you send a letter to our Annuity Department alerting them to suspend your RMD for this year. Of course, as stated above; you don’t need to take any action if you want your distribution sent to you as usual.
Other noteworthy provisions of the CARES Act
In addition to its impact on RMDs, the CARES Act contains several other provisions that may affect you and your finances.
The CARES Act created a new exception to the customary 10% early withdrawal penalty for those who take distributions from a qualified retirement plan before age 59 ½. Americans impacted by the coronavirus pandemic can take up to $100,000 from their IRA or 401k in 2020 without paying the penalty tax. The income is still subject to normal taxation, however, by default, the income will be spread out over three years. It can also be treated as fully taxable in 2020, if you’d like. If your income will be substantially lower this year due to the impact of the virus, it might make sense to pay all of the tax this year, rather than spreading it out to next two years when your income should return to normal or could be much higher. This is an option that should be discussed with your tax accountant or financial advisor.
To be eligible for the exception to the 10% penalty, the recipient or their spouse need to be diagnosed with COVID-19, or they need to have experienced financial difficulties due to being quarantined, laid-off, furloughed, having childcare issues or any number of other reasons. Since this exception is fairly broad, I’d assume that most Americans will have been impacted in some way or another and should qualify for this exception.
If you’d like more information about either the CARES Act or the SECURE Act, there is plenty of it out there. You can google both acts or visit the websites of both the IRS (www.irs.gov) and U.S. Department of the Treasury (home.treasury.gov).
Again, we hope you and your family are well and staying safe. Although we are working remotely and rotating shifts at the Home Office, we are here to help if you need any assistance with your life insurance or annuity certificates.
Until next time, stay safe, and please remember to honor our fallen heroes on Memorial Day.