How COVID-19 CARES Act Is Affecting Retirement & Taxes
Throughout the first half of 2020, citizens around the globe have been feeling the detrimental physical and financial impacts of the COVID-19 pandemic as families across the country continue to practice social distancing while following strict personal health, work and quarantine guidelines.
On the financial side, investors everywhere are experiencing the market volatility and economic turmoil of a bear market and potential recession. While some may have time to “ride out the storm,” retirees and soon-to-be retirees across the country are worried about what all of this means for their retirement.
Even after the pandemic passes, there’s no guarantee the market will bounce back quickly – no one can know for sure what will happen in the coming months. Businesses are still shutting their doors, investors are worried, and overall financial confidence appears low.
Below we’re discussing the impact COVID-19 may have on your plans for retirement, as well as recent legislation passed in America that’s designed to bring some economic relief to retirees.
The CARES Act Impact on 401(k)s and IRAs
For retirees, this market volatility likely has made some sort of impact on your retirement accounts. Depending on the makeup of your portfolio, the level of impact could vary. But if retirement is already here or right around the corner, this downward trending market could lessen the value of your available funds.
Some pre-retirees may have the option to put off retirement until the market stabilizes, others may not. In an attempt to help retirees and pre-retirees facing financial difficulties, the government had passed the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act – which can impact your 401(k), IRA or other retirement accounts.
Here are some ways in which the CARES Act has created financial savings or relief opportunities for those nearing or in retirement.
Waiving Required Minimum Distributions
In Section 2203 titled, “Temporary Waiver of Required Minimum Distribution (RMD) Rules for Certain Retirement Plans and Accounts,” those who are typically required to take minimum distributions from their retirement savings accounts will not be required to do so for the remainder of 2020.
If you originally planned to take withdrawals from your accounts this year because you were required to do so, you now have the opportunity to leave that money where it is. This gives retirees a chance to let their money grow a little longer and, hopefully, gain back some value lost during the COVID-19 pandemic.
Of course, if you still need to withdraw from your accounts, you can. But for those who were only planning on withdrawing because they had to, this change offers retirees the opportunity to reduce their tax bill come tax season.
Penalty-Free 401(k) and IRA Withdrawals
As established in Section 2202 of the CARES Act, you have the option to withdraw up to $100,000 from your 401(k), 403(b) or IRA account. This opportunity is open to anyone who has been impacted directly by the COVID-19 pandemic.
Examples of qualifying impacted individuals include:
- Someone who has contracted the virus
- Those caring for an immediate family member who has the virus
- Anyone experiencing financial distress due to being furloughed or laid off during the pandemic
- Business owners who needed to cease operation or reduce hours
With this change in policy, the typical 10% early-withdrawal penalty has been waived for qualifying individuals (based on the list above) who choose to withdraw before the age of 59 ½. In addition, you have the option to spread the tax liability of this additional income over the next three years.
Other types of retirement plans, such as money purchase pension plans or defined benefit and cash balance plans, are not discussed in the CARES Act in regards to penalty-free early withdrawals. Therefore, as of April 21, the penalty-free early withdrawal option does not apply to these types of plans.
Withdrawing any amount early from your retirement plan is a decision that shouldn’t be taken lightly, as you are taking income away from your future retirement. If you are in a situation in which you are considering this option, it’s wise to speak first with your financial advisor, as they may be able to present other options.
Income Tax Deadline Extended
On March 21, 2020, the IRS and Treasury Department announced an extension for income tax filing and payments. This means that Americans have until July 15, 2020 to file their federal tax return. Individual taxpayers who need additional time to file beyond the July 15 deadline can request an extension to Oct. 15, 2020, by filing Form 4868.
How does this affect your retirement? Because you now have three extra months to contribute money to your 401(k) or IRA. This means that if you’d neglected to contribute as much as you wanted to your retirement accounts, you have some extra time to do so. Plus, contributing now can help lower your tax obligation for the 2019 tax season come July 15.
What About Social Security?
COVID-19, as of mid-April, has had no impact on current Social Security benefits. If you’re already utilizing them or planning to claim Social Security in the near future, there has been no change and you can proceed as planned.
Planning for and navigating retirement income is already a challenge in itself. With the extra stress and confusion brought on by the COVID-19 pandemic, now more than ever you need to have a good grasp on your options. After reviewing the changes in legislation outlined above, it may be best to reach out to your financial advisor and tax professional for guidance. They can help you make sound financial decisions this year- while working to keep your retirement planning on track for years to come.
For more information on our firm or to request a complementary investment and retirement check-up with Jon W. Ulin, CFP®, please call us at (561) 210-7887 or email jon.ulin@ulinwealth.com. Get Started Today: Contact Us.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities LLC, dba Independent Financial Partners (IFP), and its advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. This report may not be reproduced, distributed, or published by any person for any purpose without Ulin & Co. Wealth Management’s or IFP’s express prior written consent.
