Stimulus Plan Changes To Retirement Contributions And RMD Rules

While the headlines have been about the $2 trillion stimulus package, the fine print brings changes to retirement plan contributions and required minimum distributions (RMDs). These relief provisions may help keep your finances healthy in the short term while you get through the Coronavirus Pandemic with your health intact

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Deadline For IRA Contributions Extended

In a typical year, Traditional IRA and Roth IRA contributions would be due by April 15th. With the tax filing deadline pushed back to July 15, 2020, your deadline to make IRA contributions has also been extended.

For those who have self-employment income or are small business owners, you will still have more time to make contributions to SEP IRAs, Defined Benefit Pension Plans, as well as Solo 401(k) plans. You will have until you file your taxes or October 15, whichever is earlier, to make your contributions to those retirement plans.

There has been some confusion on the topic of retirement plan contribution deadlines in 2020, for your 2019 taxes. At first, it was unclear if the later tax-filing deadline would also mean taxpayers had more time to make their IRA contributions. Thankfully, the IRS provided guidance (“Filing and Payment Deadlines Questions and Answers.”). For those of you who worked throughout 2019 but expect to make less in 2020 (thanks COVID), it will often make sense to max out your contributions for 2019.

When making contributions to your retirement accounts after April 15, 2020, make sure the checks include notes that they are 2019 contributions. Many custodians will automatically code checks after that date as 2020 contributions.

I would also like to point out that the extended deadlines also apply to the following types of accounts:  2019 Health Savings Account, Archer Medical Savings Account, and Coverdell Education Savings Account (ESA) contributions.

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Required Minimum Distributions Waived for 2020

The CARES Act is a $2 trillion relief and stimulus package. The full title is the “Coronavirus Aid, Relief, and Economic Security Act.” The bill includes a waiver for RMDs for the year 2020, which will be a relief for retirees who have other income or prefer to keep their money growing in a tax-favored manner for as long as possible.

Your annual RMD is based on a combination of your age and your retirement account balances as of December 31, the prior year. For RMDs in 2020, retirees would have needed to make withdrawals based on the likely much higher account balance from New Year’s Eve 2019. The Dow Jones Industrial Average ended 2019 at 28,462. As I write this post, the Dow is down to around 24,000, which is up substantially from the depths of the panicked selling when people first realized the severity of the pandemic.

For most retirees, this won’t make much of a difference. They are likely already making withdrawals above their RMD amount to pay living expenses. But for those who are better prepared, this can help reduce their 2020 tax bills. Paying fewer taxes along the way decreases your chances of running out of money later in life.

What About 2019 RMDs Not Yet Taken?

Typically, IRA owners who turned 70½ in 2019 would have had their first RMD due by April 1, 2020. However, those individuals are also included in the waiver of RMDs due during 2020. There was also confusion on this topic because the previously approved SECURE Act had increased the RMD age to 72 for those who would be turning 70½ in 2020 or later. Under the SECURE Act, RMDs were still required in 2020 for those who reached the age of 70½ in 2019. Now, the CARES Act allows for the RMD to be waived.

Can RMDs Already Taken Be Undone?

If you have already taken your RMD, you may be wondering if there is a way to put it back in, to eliminate taxes on the withdrawal. The CARES act does not specifically offer any RMD repayment options. Hopefully, the IRS will issue further guidance on this issue.  

Additional Retirement Account Changes in the CARES Act

The new CARES Act waives the 10% early distribution penalty for early withdrawals from retirement accounts. It allows for up to $100,000 of 2020 distributions from 401(k)s, IRAs, and other company plans for individuals affected by the Coronavirus Pandemic. Keep in mind, taxes would still be due on withdrawals. To make the tax hit a little less painful, the taxes due could be paid evenly over the next three years. You would also have the ability to “repay” the money back to your retirement account over the next three years as well, which would eliminate the tax hit.

It may be tempting to raid your retirement accounts. Pulling money should only be done when absolutely necessary for things like food and keeping a roof over your head. Millions of Americans are on track for a secure retirement; those numbers would drop dramatically if those individuals pulled out $100,000 now. For someone who is 35 today, pulling that money out now could mean more than $2 million less in retirement assets at the age of 70—assuming an average return of 10% per year. 

Who is covered as an “affected individual” is still a bit vague, so consult with your Certified Financial Planner and tax preparer before making a withdrawal from your retirement accounts.

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Changes to 401(k) Loans

In this difficult time, the rules surrounding 401(k) loans have also been altered. Most importantly, the maximum loan amount has been increased to $100,000 or the entire account balance (if less than $100,000). Previously, 401(k) loans had been capped at $50,000 or 50% of the underlying account balance. The change will only apply to loans taken within 180 days of the enactment of the bill.

There is also a little short-term relief for those taking 401(k) loans. Your repayment that would have been due between now and December 31, 2020, can be suspended for up to one year. Again, you should use caution before trying to mortgage your retirement security.

Saving for and living a financially secure retirement is difficult for many, even during the best of times. We need to keep our heads up and not allow panicked behavior to push us toward money decisions that we will regret in the future. This, too, shall pass. Staying the course and proactively working towards financial freedom will help ensure there is light at the end of this COVID-19 tunnel.

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