Retirement Planning Under the CARES Act
RETIREMENT planning is a complicated affair at the best of times, but new measures introduced during the Covid pandemic have created even more things to think about.
The CARES Act, rushed through Congress earlier this year to bring a relief package to Americans, covered many different aspects of our lives.
Deep inside the 1,000 pages of policy include several items that may affect your planning for retirement, creating some further flexibility.
The first headline is the suspension of a retiree having to take Required Minimum Distributions in 2020 – whether a 401(k), 403(b), 457(b) or an inherited account. It has no hidden catches or clauses – if you do not wish to take the RMD this year, you do not have to, meaning that money can have another year to potentially grow. It also means Roth conversions are easier to achieve.
The second big headline was designed to help workers now – but it comes with a sting in the tail. The government has allowed businesses and self-employed to defer payment of the 6.2 per cent social security tax, freeing up more payroll cash now. But unlike the RMD provision, this is not a gimme – the tax is only deferred, and will be due in the next financial year, along with next year’s tax payments.
People have also been given a new option to take a loan against their Individual Retirement Accounts if they meet certain conditions, including being diagnosed with Covid, being laid off, quarantined or furloughed.
You now have the option – until the year end – to take up to $100,000 from your retirement savings without the 10 per cent tax penalty usually in place for those under 59.5, and you also have the option to repay it up to three years later, though amended tax returns may need to be filed. This provision – while very helpful for many needing cash now – must be treated with care as you will be borrowing from your retirement, and if you do not pay it back, you will feel the consequences later.
There have also been several and substantial changes to charitable giving and how gifts can be taxed – including an above-the-line $300 deduction for individuals that do not have to be itemized.
As is always the case with retirement planning, it pays to seek professional advice and explore the full implications of the CARES Act for you and your family to make the most of these opportunities.
