In March, Congress passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act), a $2,000,000,000,000 (two trillion) dollar stimulus package. National news outlets have covered the most well-known benefits; taxpayer payments, tax filing deadline delays and modified COVID-19 related sick time. Additional, less known benefits like the 2020 “RMD Holiday”, updated charitable deductions, and an extension of three months to contribute to your IRA are important for you to know about.
Did You Say “RMD Holiday”?
What is this new “holiday” you might ask? Taken straight from the 2009 financial crisis playbook, it provides the option for people normally required to take a required minimum distribution (RMD), the option to not take it. This includes people over the age of 70 ½ and people who have RMDs due on their inherited IRAs. Your RMD is a federally mandated distribution after age 70 ½. If you are 70 ½ after Jan. 1, 2020, you can wait until age 72 (thank you SECURE Act). This so-called “holiday” can be quite a powerful tax planning tool. Of course, if you need the money, you can still access your funds as you normally would, but for the people that don’t need to take their RMD, congrats, you just lowered your taxable income for the year!
One great aspect of the 2020 RMD postponement is it takes the pressure off clients to sell positions that are at a lower value than they may have been at the end of last year. Although the strategy of tax loss harvesting is a wonderful tool for non-retirement accounts, it is a burden inside of a retirement account. For example, let’s assume you are 73 years old and have an IRA that had a $1,000,000.00 value on 12/31/2019. If the “holiday” wasn’t in place, you would have an RMD due of $40,485.83. That means that based on your $1,000,000.00 account value you would be forced to distribute 4.05% in 2020. Now, let’s assume that your once million-dollar portfolio is now worth $750,000.00 (that assumes a drop of 25%). If you take that same $40,485.83 RMD based on your current account value of $750,000.00 your distribution rate would now be 5.40%. Although 1.35% may not seem significant, if your account value had actually been $750,000.00 at the end of last year you would have only needed to distribute $30,364.37 – a difference of almost $10,000.00. Congress recognized this burden; thus, they instituted the “holiday”.
What if I Have Already Taken Some or All of My RMD?
If you would like to redeposit some or all of your 2020 RMD, you may be permitted to use the 60-day rollover rule. This rule states that you can roll funds back into your IRA within 60 days and not have it count as a taxable distribution. Please note, a 60-day rollover can only be done once every 365 days; therefore, if you used this feature within the last year, you may not be eligible.
What About Charitable Contributions?
There are two noteworthy changes to 2020 Charitable Contributions in the CARES Act. The first item is an increase in the Above-the-Line-Deductions. This means you can directly deduct up to $300.00 in cash in 2020 without having to itemize deductions. Please note that this deduction does not include gifts to donor advised funds and non-operating private foundations. The second benefit is the 60% of Adjusted Gross Income (AGI) limitation has been removed. Historically, you could only gift up to 60% of your AGI and any gift above that number would be carried forward for up to 5 years. For 2020, you can gift cash up to 100% of your AGI; anything above that is carried forward for five years. Remember, unlike the increase in the Above-the-Line-Deductions, the AGI limitation reduction is only good for the 2020 tax year.
Are There Other Benefits I Should Know?
There are. If you need to take a withdrawal from your Qualified Retirement Plan or your IRA due to a COVID-19 related issue, an individual can “self-certify”, and the 10% penalty tax for early withdrawal (prior to 59 ½ years young) no longer applies. The maximum amount permitted for withdrawal is capped at $100,000.00. Participants may be permitted to recontribute the amount over a 3-year period as a rollover, without affecting normal contribution limits.
Finally, the CARES Act has also extended both the federal tax filing deadline and the 2019 IRA and HSA contribution deadline to July 15, 2020. This means that you have an additional 3 months to both file your taxes and max out your 2019 IRA and HSA if you have one. Please check with your state to see if your state deadline has been extended.
The information in this material is not intended to act as individualized tax, legal or investment planning advice. Please consult a qualified lawyer, tax professional, financial planner or investment advisor for specific information regarding your individual situation.