While bad news has abounded in
the last month, the Government's adaption to the current economic environment
may actually bring good news to some. How? The CARES Act (Coronavirus Aid,
Relief, and Economic Security Act) was signed into law on March 27, 2020. The
more than $2 trillion package seeks to address financial pressures facing
individuals, businesses, state and local governments due to the pandemic. While
most of the Act is focused on economic stimulus, here are questions to consider
that may help your particular situation:
Can I take money from my IRA to cope with the economic
slowdown? Yes. The CARES Act waives the 10% early withdrawal
penalty and allows you to withdraw up to $100,000 from your IRA and not be
penalized. You will still owe income tax on that withdrawal, taxed at your
ordinary income tax bracket. But the provision is for people who have been
affected by the coronavirus — either you've gotten sick, or your spouse has, if
one of you has lost your job or income, or your business has been impacted, so
be prepared to have to show this if you're using the money.
Can I put the money back to avoid having to pay income
tax on funds I end up not using? Yes. Say you're in the 22% tax
bracket — you'll owe 22% on the amount you've withdrawn ($22,000 on a $100,000
withdrawal) but you'll have three years to pay the taxes off! You can
split it up equally between 2020, 2021 and 2022. Additionally, you can return
cash to your IRA from this early withdrawal whenever you want over the next
three years to avoid owing the taxes pro-rata.
Do 401(k) plans get the same treatment? Sort
of, but not exactly. When you take money from an IRA, you're taking your own
money back, minus the taxes you owe. In order to take money from a 401(k),
403(b) or 457(b), it's either a distribution or a loan against those assets.
But the CARES Act has expanded the size of the loan you can take from your
401(k) type plan. The borrowing limit has been raised from $50,000 to $100,000.
The 10% penalty has been waived, just like for IRA owners. If you choose to
take a distribution from a 401(k) type plan, you also have three years to repay
the loan to minimize what you owe in income tax.
Can I borrow from my IRA instead of taking a withdrawal?
Sorry, the answer is no. You cannot take a loan against your IRA and use those
assets as collateral. This would be viewed as a "non-qualified distribution" in
the eyes of the IRS. Don't even attempt it.
Can I freeze my required minimum distributions if I don't
want to sell stocks down 30% from their highs? Yes.
Investors over the age of 72 have been given a waiver to halt RMDs through
2020. Which means you can wait to take money out of an IRA (or other qualified
plan account) until next year.
For those with beneficial IRAs that have been inherited
from deceased parents, we're still waiting for definitive guidance, so hold off
before taking these distributions for now. If you have already taken your RMD,
you may be able to just roll that amount back into your IRA but talk
with your oXYGen Private CFO® or tax professional first.
The CARES Act is a detailed stimulus package that may
bring you some good news but perhaps it also raises questions and the details
seem a little unclear. Call your Private CFO®, or simply click on our
website link https://oxygenfinancial.com/contact-us and type in "I have
questions about the CARES Act". We are here to help you Breathe Easier®.