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New Tax Legislation drives Retirement Considerations

With the passage of the CARES Act come several key changes that impact retirement-related decisions. Please consider the following items as you have discussions with your CPA or financial advisor related to retirement and your retirement accounts.

For calendar year 2020, required minimum distributions (RMDs) have been waived for IRAs and qualified defined contribution (401(a)/401(k))), 403(b), and 457(b)) plans. For those who have already withdrawn part or all of their 2020 RMD, please reach out to your financial advisor as soon as possible if you wish to recontribute the distribution to the retirement plan, as there is only a 60-day window during which you can recontribute those funds. But you can't do this if you have done the same thing within the prior 12-month period. Note that Qualified Charitable Distributions (QCDs) will not be permitted in 2020 if the RMD is forgone.

For those under 59 ½, a new provision in the CARES Act allows for a "coronavirus-related distribution" up to $100,000 that will be exempt from the 10% premature distribution penalty. This premature distribution can be repaid over a three-year period, above the caps on yearly contributions, and, to the extent not repaid, is taxable over those three years. A 2020 coronavirus-related distribution is permitted for an individual who:
  1. Is diagnosed with COVID-19;
  2. Has a spouse or dependent diagnosed with COVID-19; or
  3. Experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having reduced work hours due to the virus, being unable to work due to lack of child care, or the closing or reducing hours of the business owned by the individual due to the virus or any other factor determined by the Treasury Secretary.
A qualified plan loan is allowed up to the lesser of $100,000 or 100% of the account balance. (IRAs are not allowed to make loans to a participant.) The loan must be made before September 24, 2020. There is a one-year extension to the due date for a previously-made participant loan otherwise due between March 27, 2020 and December 31, 2020 for a coronavirus-related distribution as outlined above; however, interest will continue to accrue and a new amortization schedule should be calculated to properly take into consideration this new loan.

Traditional IRA to Roth IRA Conversion Considerations

As a result of the pandemic and the stock market facing a steep decline, this downturn provides an opportune moment to consider converting funds in a Traditional IRA to a Roth IRA. Below are a few reasons to consider making this transition.
  1. Many individuals will have less taxable income in 2020. Thus, the requirement to pay the tax on the amount rolled over from a Traditional IRA to a Roth IRA may prove advantageous for those who find themselves in a lower tax bracket in 2020. Note that all funds withdrawn from the Traditional IRA should be rolled into the Roth IRA, as opposed to being used to pay for the additional tax, as any funds not put back into the Roth IRA will be subject to a 10% penalty. The 10% penalty will only be waived for IRA distributions taken to assist with a coronavirus-related circumstance, not to pay tax on a rollover.
  2. Because IRA values are down with the expectation that they will recover, now is an ideal time to move those dollars into a Roth IRA that will grow tax free. Additionally, when the funds are taken out of a Roth IRA in retirement or by other beneficiaries after the death of the participant, they will also be tax free.
  3. Given the $2 trillion stimulus package just announced, on top of the current $23 trillion national debt, eventually this increased national debt will need to be paid back. Although federal expenditures can certainly be cut to bring the budget in line, many expect that taxes will have to increase in the future in order to pay for this debt. The ability to weather future tax increases by converting your money to a Roth IRA is an outstanding reason to take this step.
Please feel free to reach out to us any time if you would like to discuss any of these items.