A new Mercer Advisors webinar explores the relief options and growth opportunities involving retirement accounts under Congress’ $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act.
As part of recent U.S. legislation providing economic relief in the wake of the COVID-19 pandemic, people who need emergency access to their retirement funds can withdraw up to $100,000 without penalty through Sept. 23, 2020. Congress’ $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act also creates some attractive ways to grow your retirement savings and reduce your tax liability this year.
We’ve summarized the highlights below for retirees and those who are saving for retirement. You can also replay this presentation along with our other CARES Act webinars found in the Mercer Advisors Resource Center.
Please note that the CARES Act programs are evolving quickly and adjusting to the current situation. The information in this guide is accurate as of April 10. The information that is provided in it is for information purposes and is not intended to replace tax or legal advice specific to your situation.
The CARES Act temporarily eases key restrictions on early withdrawals from IRA and 401(k) accounts as a means of easing the financial repercussions of COVID-19. In addition, the law allows current retirees and beneficiaries of an inherited retirement account to forgo their required minimum distribution (RMD) this year. For anyone age 70 ½ or older, the RMD waiver also makes 2020 an ideal time to think about moving funds from a traditional IRA into a Roth IRA as a means of reducing your tax burden and increasing your long-term retirement income.
Even if you’re under age 59 ½, you can take a distribution of up to $100,000 from a qualifying IRA plan without incurring the usual 10% early-withdrawal penalty. The distributed funds will not be subject to mandatory tax withholding, which is normally 20%. The penalty and withholding waivers apply through 2020.
You need to self-certify that you, your spouse, or a dependent have either been diagnosed with COVID-19 or experienced a direct financial impact due to the pandemic. Check with your IRA provider to confirm any other plan-specific requirements or restrictions.
The amount you withdraw will be counted as income on your 2020 tax returns. However, the CARES Act allows you to spread the total tax liability for your early distribution over the 2020, 2021, and 2022 tax years. Or, you can avoid some or all of that related tax liability if you recontribute funds back into your IRA between now and the end of 2022. Your recontributed funds would be treated as a rollover, meaning they are not subject to normal IRA contribution limits.
You can borrow up to $100,000 or 100% of your vested 401(k) account balance, whichever is less—up from the previous limit of $50,000 or 50% of the vested balance. Under the CARES Act, any loan repayments that would have been due between March 27, 2020 and December 31, 2020 can be deferred for one year. Check with your 401(k) administrator to confirm any other plan-specific requirements or restrictions.
Here are two reasons to waive this year’s RMD, if possible:
If you need money that would otherwise come from an RMD, consider withdrawing from one of your taxable accounts instead. As always, check with your tax and financial planning consultants if you’re unsure what decision is best for your overall situation.
Yes, you can roll back the RMD within 60 days. RMDs received more than 60 days ago might still be returnable if you can show you were affected by COVID-19. In either case, you are only allowed to roll back an RMD once every 365 days.
No, the waiver also applies in your situation. You don’t need to take either the 2019 or 2020 RMD this year.
In general, a Roth IRA provides some significant advantages such as:
The trade-off is that you pay taxes on Roth contributions up front. Thanks to the CARES Act, whatever RMD amount you normally would have taken from your retirement account this year can be converted to a Roth IRA with the same tax impact if you had received the usual RMD. By swapping the RMD for a Roth conversion, you can put more of your money toward retirement. Also, since the financial markets are currently lower than they were at the end of 2019, the benefit of doing a Roth conversion now instead of taking an RMD is greater still.
Yes. You can offset the Roth conversion taxes with charitable donation deductions. Under the CARES Act, for any cash donations you make to 501(c)(3) public charities this year, you will be able to deduct the full amount—up to 100% of your adjusted gross income (AGI)—on your 2020 tax return. Previously, the deduction limit had been 60% of AGI. This creates an opportunity for a large donation deduction to offset the tax liability of your Roth IRA contribution, potentially reducing it to zero.
Your financial advisor and tax preparer can help you better understand how to take advantage of these and other specific CARES Act provisions. You can also replay all of our webinars at the Mercer Advisors “Insights for Navigating Recent Events” Resource Center. Visit this site often for updates on the CARES Act and other COVID-19-related developments affecting the global financial markets.
Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate, but is not guaranteed or warranted by Mercer Advisors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors. Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy or product made reference to directly or indirectly, will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance and results of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. This document may contain forward-looking statements including statements regarding our intent, belief or current expectations with respect to market conditions. Readers are cautioned not to place undue reliance on these forward-looking statements. While due care has been used in the preparation of forecast information, actual results may vary in a materially positive or negative manner. Forecasts and hypothetical examples are subject to uncertainty and contingencies outside Mercer Advisors’ control. Mercer Advisors is not a law firm and does not provide legal advice to clients. All estate planning documentation preparation and other legal advice is provided through its affiliation with Advanced Services Law Group, Inc.