What the Cares Act Means for Your Finances and Retirement

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As the economic impact of the coronavirus rages on, President Trump recently signed the Cares Act into law. The fiscal stimulus aims to alleviate the economic impact brought on by the outbreak of COVID-19 in the U.S.

The U.S. has become the epicenter of the outbreak with over 165,000 of the over 809,000 confirmed global cases, per Johns Hopkins University.

The social distancing aimed to combat the spread of the virus has essentially stalled the U.S. economy as much of the country and its businesses remain closed. Trump recently extended the date for social distancing guidelines to April 30.

So what will the Cares Act do to help? It’s more than a relief check. We assembled a panel of experts to break down the particulars of the act, and more importantly, how they impact you:

Bob Powell

Editor, Retirement Daily

Tracy Byrnes

Financial Advisor, UBS

Denise Appleby

CEO, Appleby Retirement Consulting

Jay Abolofia, PHD, CFP

Founder, Lyon Financial Planning

For an in-depth discussion with Denise Appleby on these subjects, listen to Robert Powell's Retirement Daily Podcast on Soundcloud

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Video Transcript: 

ROBERT POWELL: (00:02)
Hi. Bob Powell here, Editor of TheStreet's Retirement Daily. And as many know, President Trump recently signed into law the CARES Act. Here to help us unpack that act is Tracy Byrnes, Financial Advisor from UBS, Denise Appleby, CEO of Appleby Retirement Consulting, and Jay Abolofia from Lyon Financial Planning.

ROBERT POWELL: (00:22)
Tracy, let's start with you. How are the markets responding to the CARES Act being signed into law, and what should investors be doing now or thinking about doing?

TRACY BYRNES: (00:31)
Yeah. So you know as well as I that the market likes to know what's going on. So we're getting closer, by no means are we there yet. And this actually is a really great step. The market's happy. It's up 500 points right now, but that doesn't mean we are done. It doesn't mean we hit the bottom. We are certainly not calling that, but people should certainly start to look at their portfolios. Amazing time to rebalance, Bob. I mean, your portfolio is certainly off. It's skewed. So start to really think, do you have three to five years liquid? Now more than ever, we know that's important. So try to figure out how to get some cash in there.

TRACY BYRNES: (01:04)
And then start to look at the big themes. Let's not forget, the economy before all this was rock solid. It was doing really well. This is a health issue that we're dealing with. But as far as the economics go, and I'm sure Jay could talk to this too, we were doing okay. So think about the big things, the themes we're going to see, 5G, telecommuting, biotech, sustainability. These are themes that we're going to see more and more of. We're going to see companies dive into this more and more, and that's probably where investors should be looking going forward.

ROBERT POWELL: (01:35)
All right. And Denise, the CARES Act contains many provisions that affect retirement account owners. What are some of the more important ones that they need to know about, and what sort of action steps should they be taking with their retirement accounts, or not taking?

DENISE APPLEBY: (01:47)
Well, talking about the market, right? As you know, whatever you had in your retirement account on December 31st, you have only a fraction of that now, right? And so that leads me to the issue of Required Minimum Distributions, which IRA owners who were at least age 70 and a half on December 31, 2019, have to take for 2020. And so know you're looking at a retirement account balance that was significantly higher than what it is now, and therefore the RMD calculation, when you look at it from a proportional perspective, it's much larger than what it should be. Now luckily, the CARES Act include provisions that say we don't have an RMD this year, right? Any distribution that you take is optional. And so the question becomes, what do you do if you have already taking that RMD? Because typically speaking, an RMD is considered ineligible for rollover, meaning once you take it, you cannot put it back. But the CARES Act includes a provision that says we don't have an RMD this year. Which means if you did take that distribution, you can put now it back within 60 days.

DENISE APPLEBY: (02:58)
And the question that I've been getting is, "Well, what if I missed the 60-day deadline?" Well, there are several provisions that extends the 60-day deadline. So if you think that you might miss the 60-day deadline, talk to your financial advisor. There's also something called the one-per-year rollover rule to think about because you might be thinking, "Oh, great, I have this RMD, I can roll it over." But the regulations say if you take a distribution from an IRA and you roll it back within 60 days, you can only do that once during a 12-month period. So what do you do if you're going to be in violation of that 12-month period?

DENISE APPLEBY: (03:37)
Well, two solutions are roll it to a Roth IRA as an indirect Roth conversion. Yeah. You're going to pay income taxes on it, but at least it's going to be in an account where it grows tax deferred and eventually becomes tax free. And now everyone can do a Roth conversion, right? Before the CARES Act, you would have to say, let me take my RMD first before I do a Roth conversion. Since we don't have RMDs anymore, that's not an issue. You could also roll those funds into an Employer-Sponsored Retirement Plan, such as a 401(k) or 403(b) plan, if you find that you come up against the one-per-year rollover rule.

DENISE APPLEBY: (04:17)
Now there's an issue though for people whose first RMD was due for 2019 because typically your RMD has to be taken by December 31st of the year for which it is due, right? But there's an exception that says for the year your first RMD is due, you have until April 1st of the next year to take it? That brings us to 2019 RMDs. And the CARES Act says... There's a split in the CARES Act, so you've got to pay special attention here. If you have an RMD for 2019 and you took it in 2019, well, bye, see you. That's an RMD. You cannot put it back. But if you waited until 2020 and you took it in 2020, you don't have an RMD for 2020, so you can roll it over within 60 days of receipt.

ROBERT POWELL: (05:06)
So many complications, Denise. We'll I'm sure have a chance to talk more about all the other provisions that affect retirement account owners in another segment.

ROBERT POWELL: (05:15)
Jay, to you, I'm getting lots of emails from panicked investors asking whether, in my words, is now the time to de-risk my portfolio? And then secondly, what are the implications for those who follow the principles of life-cycle saving and investing? Is this something that changes everything, or not?

JAY ABOLOFIA: (05:36)
Great questions. So de-risking first. Now more than ever is really a great time to take a look at your risk capacity. Your risk capacity is how much risk you can afford to take with your investments. So if you're 60 years old and you're looking at 30 to 40 more years of investing, if markets were really poor over those next 30, 40 years, could you still afford to maintain your living standard and all of your desired expenses? If the answer is no, then you're taking too much risk. And I think some folks might actually still be in a position where they don't need to take as much risk as they have. So for those folks who don't really need the risk, this is a fine time to de-risk. Even if you're selling when the market's low, you've already won the game to some extent. So revisiting how much risk you can afford to take, your risk capacity, is a very valuable thing.

JAY ABOLOFIA: (06:40)
Life-cycle financial planning. So quickly what we're talking about here, Bob, is the financial planning puzzle of we spend over our entire lives, but we only earn over a portion of it. So we have to save some of those earnings to be able to maintain our expenses and our living standard throughout our lives. The pandemic is interesting because it can impact both our financial capital, our savings. It can also impact our human capital. If we get sick and we can't work, that's a very big risk to our financial plan. So life-cycle financial planning says you need to protect your financial capital, your savings, by making sure that you're not taking too much risk. And you also need to protect your human capital. Especially when you're younger, your human capital is your future earnings, right? Well, how do you protect that? Things like long term disability insurance, making sure that you have adequate life insurance to protect your survivors. So again, now is a great time to revisit your broader financial plan.

ROBERT POWELL: (07:44)
That's good advice, Jay. So to each of you, any last words, anything that we haven't touched upon that you think our viewers must absolutely, positively know before we wrap up? Tracy, you want to start?

TRACY BYRNES: (07:56)
I mean, yeah, I'll drop in for sure. It was mentioned, but consider converting to a Roth IRA. Now your account is down. You can pay the taxes. Taxes will inevitably go up after this. We've got to pay for this somehow, otherwise my great-great-grandchildren will be. So look at your stuff. Now is a great time to call your advisor. And don't forget, even with all the horribleness, the market is kind of on sale. And there are some great opportunities, don't be afraid of it. I don't want people to hide under the mattress like they did after the financial crisis. Don't do that. We have a solid foundation here, and we have some blue chips that were taken down. It might be a good time to call your advisor and to consider that.

ROBERT POWELL: (08:39)
Great. Denise?

DENISE APPLEBY: (08:41)
Yeah. There's so much that I didn't cover. For instance, you can take up to a $100,000 distribution from a retirement account now as a coronavirus-related distribution, and guess what? If you're under age 59 and a half at the time that you take the distribution, the usual 10% early distribution penalty is waived. Also, typically when you take a distribution from a retirement account, I talked about the 60-day deadline. That 60-day period is waived in this case, and now you have three years over which to rollover that distribution. And if you decide not to roll it over, you can spread the income from that distribution over a three-year period. And finally, if your plan offers loans, if you're eligible for a coronavirus-related distribution, and you've got to meet certain requirements to be eligible. If you're eligible for that, you're eligible for an increase in the loan limit, which used to be or is ordinarily $50,000, but is now $100,000 for a coronavirus-related distribution.

ROBERT POWELL: (09:42)
Great. Thanks. Jay, any last words of wisdom?

JAY ABOLOFIA: (09:45)
For those folks who are potentially panicking and are especially at or near retirement, this is scary time. So I'd say take a step back, okay? Take a step back, try not to panic, and think about what you can do today and over the rest of your life essentially to insulate yourself, to protect yourself. And I think a few things are if you're still working, considered delaying retirement. There's huge value in that if you can, if you can bring in more income into your plan. Revisit your expenses, just like businesses are doing right now. To the extent that you can, cut back where necessary. Especially when you're drawing from your portfolio, that scary sequence of returns risk is a real one, so look at your expenses. And one other one actually as a way of de-risking your portfolio is, if you can do it, delay Social Security to age 70 because that's kind of the best investment you're going to find. And if that means drawing from cash investments, IRAs, that's still a great strategy.

ROBERT POWELL: (10:52)
Great. Tracy Byrnes, Denise Appleby, Jay Abolofia, thanks ever so much for helping us unpack the CARES Act.

JAY ABOLOFIA: (10:58)
Thank you, Bob.

DENISE APPLEBY: (10:59)
Thank you. Thanks for having us.

TRACY BYRNES: (10:59)
Thank you.

ROBERT POWELL: (11:01)
Pleasure. Thanks for listening. I'm Bob Powell, Editor of TheStreet's Retirement Daily. Thanks for watching.