COVID-19 Pandemic: Retirement Plans and the CARES Act
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The CARES Act impacts several different elements of our retirement plan system.
Before getting into the details, I will again state that in addition to our tax and accounting practice, we are also fully licensed wealth management professionals. Nothing in this article is meant to be taken as investment advice and any discussion of investments is meant in a broad, general term within the context of taxation.
As we practice in both disciplines, we have a unique perspective on this - the long view.
In a recent post, we discussed the fact that some people may feel that they have no other option than to withdraw funds from their retirement plan. We suggest that before doing this, one should at least inquire with their fund administrator if there is a possibility of taking out a loan against those funds instead of an outright distribution.
This article will discuss the mechanics of taking such a distribution if your plan doesn't include a loan feature.
In 'normal' times, taking an early distribution from a retirement plan often comes with a 'double whammy' in the form of a 10% penalty and the potential for a 'Cliff Effect'.
The Cliff Effect refers to a strange phenomenon wherein a marginal dollar of income yields an out-sized effect in tax. Often this occurs when a distribution from a retirement plan kicks one's income up to the next highest tax bracket. Often times, such an increase in income will also trigger a phase out of certain tax benefits (credits, deductions, etc).
The CARES Act sought to lessen some of these effects with these changes:
Distributions related to COVID-19 of up to $100,000 are not subject to the 10% early distribution penalty.
Any income tax incurred as a result of such a distribution can be paid over a three year period.
Individuals over 59 1/2 can repay the distribution over a 3 year period, but may not contribute more than they took out.
Regarding RMDs (Required Minimum Distributions):
The CARES Act waived the RMD for 2020. This action was similar to the one taken during the Global Financial Crisis (GFC) during the 'aughts. The importance of this move cannot be overstated. One of the most devastating threats to a person's financial success in retirement is to be forced to sell in a down market, or a time of extreme volatility.
With that said, there is more detail than can be addressed in a short article. This RMD waiver applies only to the 2020 tax year, and to these plan types:
401(K) Plans
403(a) and 403(b) plans
457(b) plans
'Most other defined contribution plans described in 403(a) or 403(b)
IRAs (including Roth IRAs)
A word about investments, that can apply to life in general:
We get a lot of calls from people that ask some variation of "How low does the market have to go before you 'do something'?" In this context, 'do something' means sell their securities.
This is the wrong question to ask.
The right questions are: Has your situation changed? Has your time horizon changed? Has your portfolio stopped performing? Note the distinction between your own situation and the current gyrations of the market.
Paper losses are not real losses. A loss isn't a loss until you actually sell the security.
Maybe there's a legitimate reason to sell or rebalance your portfolio, and maybe there isn't. In times of such stress, it's more important than ever to take the counsel of a professional that knows your situation and can provide advice free from the emotion of the moment.
It’s been stated before in previous entries, but it bears repeating: Steady hands in rough waters keeps the ship from sinking.
Summary:
This article is walking a line between investment advice and tax advice though we're aiming to keep this discussion rooted on the tax side.
Bottom Line:
If you're considering making any type of moves in your investment portfolio, we want you to understand the tax implications of these moves, and to strongly suggest you reach out to your investment adviser first.
Thank you again for this opportunity to serve.
Stay safe and wash your hands.
Sincerely,
Jonathan Rivlin, CPA
President
The Rivlin Group PC
Disclaimer:
The purpose of this article is for informational/educational use only. No client relationship is intended by virtue of your use of this article. This article cannot be relied on for official advice regarding your specific situation, and is meant only to be general in nature. Because the regulatory environment is so dynamic at this time, it is possible that the content in this article will be superseded. This article was drafted on 12th April 2020.