Time is running out to take advantage of certain retirement- and tax-related provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act which are set to expire on Dec. 31, 2020.
The $2 trillion economic relief package, which was signed into law in March, contained provisions regarding retirement plans, including expanded and penalty-free withdrawal rights, expanded loan rights, extended rights to repay loans and withdrawals, and a deferral of mandatory distributions.
And come Dec. 31, many of those provisions will expire. Here’s a review of some of the more noteworthy opportunities.
The last day to take a coronavirus-related distribution is Dec. 30, 2020.
According to Denise Appleby, CEO of Appleby Retirement Consulting, a qualified individual may take coronavirus-related distributions of up to a total of $100,000 for 2020. And such distributions qualify, she said, for three key tax benefits:
- Coronavirus-related distributions are not subject to the 10% early distribution penalty that applies to distributions taken before the account owner reaches age 59½.
- The income from distribution may be spread over three years (2020, 2021 and 2022), allowing for flexibility with managing any income tax that might be owed on the amount. “This is unlike other distributions which are generally required to be included in the recipient’s income for the year in which the distribution is made,” said Appleby.
- The recipient has three years to roll over a portion or all of the coronavirus-related distribution, instead of the usual 60-days.
According to Appleby, coronavirus-related distributions may be taken from any type of tax-deferred retirement account -- all types of IRAs (traditional, Roth, SEP and SIMPLE), and employer plans, such as 401(k)s, pension plans and 403(b)s.
“However, for employer plans, it is up to employers whether they want to make it an available option under their employer-plans,” she said.
In general, an individual is qualified to take a coronavirus-related distribution if the individual or the individual’s spouse or dependent is diagnosed with COVID-19, said Appleby.
An individual is also qualified, said Appleby, to take a coronavirus-related distribution if the individual, the individual’s spouse, or a member of the individual’s household (someone who shares the individual’s principal residence) experiences adverse financial consequences due to COVID-19, including:
- being quarantined, being furloughed or laid off, or having work hours reduced;
- being unable to work due to lack of childcare;
- closing or reducing hours of a business that they own or operate;
- having pay or self-employment income reduced or,
- having a job offer rescinded or the start date for a job delayed.
For his part, Jeffrey Levine, director of advanced planning at Buckingham Wealth Partners, said in an interview published on Retirement Daily that qualified individuals who have not yet taken advantage of the CRD might consider doing so now – before the end of the year – as a precautionary measure.
Among the reasons for doing so: 2021 may prove to be as challenging a year as 2020. Congress may not extend this provision in the CARES Act. And one might find themselves in 2021 in an even worse financial situation than they are in now.
“We could very realistically see another dip in the market,” said Levine. “We could see another round of major layoffs, etc. We just don't know. So, it makes sense to take the distribution now and see what happens next year.”
2020 Required Minimum Distributions
The CARES Act also waived RMDs for 2020, said Sarah Brenner, director of retirement education at Ed Slott and Company.
And this, she said, creates a unique planning opportunity for those who want to convert to a Roth IRA. “Normally, the rules require that an RMD be taken prior to a conversion and the RMD itself cannot be converted,” she said. “Now with no RMDs for 2020 under the CARES Act, the amount that would have been the 2020 RMD can now be converted. Once RMDs are back for 2021 this opportunity will be gone.”
Qualified Charitable Distributions from IRAs
Despite the CARES Act waiver of RMDs, Brenner said qualified charitable distributions (QCDs) from their retirement accounts are still available. And the deadline for taking a 2020 QCD is Dec. 31, 2020. “Many people mistakenly believe that because there are no RMDs for 2020 there are also no QCDs,” she said. “That is not the case.”
According to Ed Slott’s IRA Advisor:
- IRA owners who are at least age 70½ are eligible to transfer up to $100,000 of contributions to charity directly from their IRA in 2020.
- Those who have not yet attained age 70½ cannot make QCDs – even if they will reach age 70½ by the end of the year. QCDs can be made from traditional IRAs, Roth IRAs and inactive SEP and SIMPLE IRAs.
- QCDs can only be made through a direct transfer of IRA funds to charities eligible to receive tax-deductible contributions under IRS rules.
Although taxpayers who make QCDs cannot also take a tax deduction for the charitable gift, QCDs still provide a valuable tax break since they exclude the distributed amount from taxable income.
One caveat: QCDs can become taxable when combined with post-70½ deductible IRA contributions, according to Ed Slott’s IRA Advisor.
Charitable Contributions Made in 2020
Previously, charitable contributions could only be deducted if taxpayers itemized their deductions.
But the CARES Act changed that, at least for 2020. According to the IRS, taxpayers who don't itemize deductions may take a charitable deduction of up to $300 for cash contributions made in 2020 to qualifying organizations. For the purposes of this deduction, qualifying organizations are those that are religious, charitable, educational, scientific or literary in purpose.
Besides helping a needy or worthwhile cause, Levine said charitable contributions of this sort also lower a taxpayer’s adjusted gross income.
No Annual Limit on 2020 Charitable Deduction by Itemizers
Levine said individuals who are “really fortunate and looking to support causes that are near and dear to them” can actually give this year what's called a qualifying charitable contribution.
For 2020 only, the CARES Act allows itemizers to deduct charitable contributions up to 100% of their adjusted gross income and completely wipe out their income tax liability, said Levine.