We hope all of you are staying safe and healthy. And although the world seems to have changed almost overnight, we remain steadfast in our desire to help you navigate these trying times. We thought it would be helpful to summarize three major initiatives recently made by the government that are potentially relevant to you and your finances.
- The IRS extended the federal income tax filing deadline to July 15. As a result, the deadline for funding IRA and Health Savings Accounts (HSA) has also been delayed until this date. Most states, including California, also postponed filing and payment deadlines to July 15.
- Required Minimum Distributions (RMDs) now begin at age 72; individuals may contribute to their IRAs after age 70½; and (with a few exceptions) distributions to individual IRA beneficiaries must be taken within 10 years of the death of the account owner (see SECURE Act details below).
- RMDs are waived for 2020, certain IRA distributions may be taken without the 10% penalty, and retirement plan loan limits have been temporarily raised (see CARES Act details below).
On December 20, 2019 President Trump signed into law the Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act. This Act went into effect January 1, 2020 and includes significant provisions aimed at strengthening retirement security across the country. Here are some key takeaways that may impact you:
Required Minimum Distributions (RMDs) Will Start at Age 72, not 70½: Starting January 1, 2020, you will need to start withdrawing money from your traditional IRA at age 72, a change from the current withdrawal requirement of age 70½. If you turned 70½ in 2019, you will still need to take your RMD for 2019 no later than April 1, 2020. If you are currently receiving RMDs (or should be) because you are over age 70½, you must continue taking these RMDS. Only those who turn 70½ in 2020 or later may wait until age 72 to begin taking required distributions. (Note: The subsequently passed CARES Act changes this for 2020 as described below.)
Individuals Can Contribute to Their Traditional IRA After Age 70½: Beginning in the 2020 tax year, the new law will allow you to contribute to your traditional IRA in the year you turn 70½ and beyond, provided you have earned income. You still may not make 2019 (prior year) traditional IRA contributions if you are over 70½.
Inherited Retirement Accounts: Upon the death of the account owner, distributions to individual beneficiaries must be made within 10 years, not spread out over the expected lifetime of the beneficiary. There are exceptions for spouses, disabled individuals, and individuals not more than 10 years younger than the account owner (such as a slightly younger sibling, for example). Minor children who are beneficiaries of IRA accounts also have a special exception to the 10-year rule, but only until they reach the age of majority.
Adoption/Birth Expenses: The new law allows penalty-free withdrawals from retirement plans for birth or adoptions expenses, up to certain limits.
529 Plan Student Loan Repayments: Allows the use of tax-advantaged 529 plans for qualified student loan repayments (up to $10,000 annually).
In response to the COVID-19 pandemic, on March 27 President Trump signed into law a $2 trillion stimulus package titled the Coronavirus, Aid, Relief, and Economic Security Act (CARES Act). This bill has several retirement provisions meant to provide relief for those affected by physical or economic hardship during the pandemic.
Waiver of Required Minimum Distributions (RMD) for 2020: Required minimum distributions from retirement contribution plans (i.e., IRA, 401K, 403B, 437B) are waived for 2020, including both individual IRAs and inherited IRAs. The purpose behind this provision is to provide relief for those who would have been required to take a proportionally higher distribution from a retirement account that has now fallen in value. (RMDs are calculated based on the prior year’s December 31 account balance.) Note that this waiver does not apply to Defined Benefit Plans.
This waiver also applies for those individuals who turned 70 ½ in 2019 and deferred taking distributions until the April 1, 2020 deadline.
If an individual has already taken an RMD for 2020, he/she may transfer the funds back into the account within a 60-day rollover period of taking the withdrawal. If more than 60 days have elapsed since the withdrawal was taken, a waiver must be obtained to return the funds to the account. (Keep in mind that the IRS allows only one 60-day rollover per 12 month period.) Rolling funds back into an inherited IRA is not possible.
Another option if an RMD has been taken is to convert the distributed RMD assets into a Roth IRA. In this situation, the individual will still pay taxes on the distribution, but the assets will grow tax-free and not be subject to the lifetime RMD rule of Traditional IRAs or Beneficiary IRAs.
Waiver for early distributions taken from retirement accounts: Qualified individuals may take coronavirus-related distributions (CRD) without the normal 10% early distribution penalty that occurs for those under age 59 1/2. Up to $100,000 may be withdrawn from an IRA or employer workplace plan (e.g. 401K, 403B, 457B). Although withdrawals are still subject to taxation, individuals may spread the income tax due over three years. Additionally, previously distributed amounts may be repaid back into the qualified retirement plan within this three-year period. This would have the effect of nullifying the income tax and allow for a tax refund. We anticipate an amended tax return would need to be filed in order to notify the IRS of the repayment.
Qualified Individuals must meet one or more of the following:1. Diagnosed with COVID-192. Spouse or dependent diagnosed with COVID-193. Experiences financial hardship due to quarantine, furlough, etc. due to COVID-194. Other factors as determined by the Treasury Limit
Temporary Increase Plan Loan Limits: Retirement plan loan limits have been raised to the lesser of $100,000 or 100% of the individuals vested account balance. Loans must be taken within 180 days of the March 27 bill passing. Additionally, individuals with a plan loan repayment due through December 31, 2020 may delay their loan repayment up to one year.
Provisions for Additional Health Savings Accounts Distributions: The CARES Act adds over-the-counter items as a qualified medical expense for those who have a Health Savings Account (HSA) or Flexible Spending Account (FSA). Additionally, other services such as telehealth and remote care are now covered as pre-deductible expenses.
We hope this information proves useful to you. We strongly encourage you to check with your tax attorney or CPA before acting on any of the information as this is a summary of the new legislative acts. Please feel free to reach out to us if you have any questions.