C.A.R.E.S. Act Retirement Plan Summary
Waiver of Required Minimum Distributions (RMDs) for 2020
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act. One of the key elements of the CARES Act is the suspension of taking required minimum distributions (RMDs) from qualified retirement plans such as IRAs, 401(k)s, 403(b)s and 457(b) plans, during 2020.
To clarify, the CARES Act allows retirement plan owners to skip both their 2020 RMD, as well as their 2019 RMD if it was their first required year to take an RMD (i.e. they turned 70 1/2 in 2019) and they had not yet taken their RMD by April 1, 2020.
For retirement plan owners who took their RMD within the past 60 (sixty) days, they can repay the distribution back into the plan during the 60-day window and avoid paying any income tax on the distribution.
If taxes were withheld when the RMD was taken, the withholding cannot be refunded. The retirement plan owner can, however, file for a refund for the withheld amount as part of his or her 2020 tax return.
Exception to 10% Penalty for Pre-Age 59 1/2 Withdrawals
The CARES Act also created a new exception to the 10% early withdrawal penalty for taking retirement plan distributions before reaching the age of 59 1/2 years. In 2020, retirement plan owners can take up to $100,000 (one hundred thousand dollars) from their retirement plan before age 59 1/2 without penalty, as long as the following criteria are met: the retirement plan owner or his or her spouse has been diagnosed with COVID-19, or has experienced adverse financial consequences as a result of the current pandemic due to being quarantined, laid off, furloughed, having reduced housing, childcare issues, etc., as well as several other criteria set forth in the Act.
Retirement plan owners still have to pay ordinary income tax on the pre-age 59 1/2 withdrawal. However, repayments made back to the retirement plan within three years will result in the distribution not being subject to federal income taxation. For distributions taken that are not paid back to the plan, the retirement plan owner can spread out over a 3-year period the taxes owed on the distribution.
Qualified Charitable Distributions from IRAs
Under current law, retirement plan owners who are at least 70 1/2 years of age can divert up to $100,000 from an IRA to a qualified charity to offset any RMDs for the year and not incur any income tax. This is known as a Qualified Charitable Deduction (QCD). In order for a retirement plan owner to take advantage of a QCD, he or she must be at least 70 1/2 years of age, and the charitable contribution must be made directly from the retirement plan account to the charity. IRA funds distributed to an account owner, who then gives the money to charity, does not qualify as a QCD.
Furthermore, the recipient charity must be a qualified 501(c)(3) organization. Some charities do not qualify for QCD's including private foundations and donor-advised funds.
The SECURE Act signed into law on December 20, 2019, changed the required beginning date to take RMDs from age 70 1/2 to age 72. However, QCD's may still be used beginning at age 70 1/2 for those who wish to donate to charities and reduce their taxable IRA balance (i.e. reduce the size of the "pot" on which future RMD's will be based). Doing a QCD in 2020 will not, however, offset any future RMD's.
The general philosophy behind the CARES Act retirement plan provisions is to provide relief to investors who are struggling financially, physically and emotionally due to the current pandemic. Suspending RMD's prevents retirement plan owners from having to sell investments or withdraw funds from an IRA during a time of emergency and down markets, and helps them ride out the current storm until 2021.
We are all continuing to learn more each day about the virus we are fighting, new laws and relief packages, and how to get by during these extremely challenging and unusual times. While we expect to see continued market volatility, at Chesapeake Wealth Management we continue to advocate not changing one's asset allocation based on market conditions or volatility. It is natural to be extremely anxious in looking at the recent stock market roller coaster ride, but we believe that portfolio changes should be made when an investor’s fundamental, long-term goals and objectives change. Our portfolios are well diversified with high-quality assets in multiple classes both within equity and fixed income allocations and are constructed for lower levels of volatility and consistent returns over time.
We are continuing to monitor this fluid situation closely and, as always, we are available to speak directly with our clients to address any concerns. For the safety of all Chesapeake Wealth Management team members and clients, all of our employees are continuing to work remotely due to the Coronavirus (COVID-19) outbreak. However, we are readily available to assist you remotely. Please call us toll-free at 888-653-9088 or 800-434-1181 for assistance.
Please take good care and we hope you and all of your loved ones are staying healthy and safe.
Please note: This a general summary for information purposes only. It is not meant to be and should not be construed as formal legal, tax or financial advice on which the reader should rely without formally obtaining counsel pertaining to his or her specific situation.