We have all watched with bated breath as the Senate and House debated and then finally passed the 883-page Coronavirus Aid, Relief and Economic Security Act (CARES) Act. This legislation is in addition to tax relief legislation contained in the Families First Coronavirus Response Act also recently passed. Since plenty has been written already about what is in the legislation, we will focus here on what advisors can do now that the legislation has passed. We focus here on relief for individuals, and will discuss small business owners tomorrow.
1. Let your clients know about the RMD holiday and offer strategies that benefit them
If your clients are subject to RMDs that are not part of a defined benefit plan, they can skip them for 2020. This rule applies to first time RMDs due April 1 (held over from 2019) and to 2020 RMDs that aren’t due until December 31. The RMD reprieve also applies to inherited 401(k)s and inherited IRAs.
Many clients need their RMDs to live off of, but it is estimated that about 20% of people do not need their RMDs for current income. Many of these folks could be your clients, and why would they want to draw RMDs off of accounts that are down 30% (and RMDs that are calculated on elevated December 2019 values, no less).
Take the RMD holiday as an opportunity to do some distribution planning for your clients. Why don’t you perform Roth conversions now that accounts are down and RMDs aren’t required (driving down the taxable income)? I can’t think of a better conversation to have with a client.
Or at the very least, discuss forgoing RMDs and drawing down the clients’ cash reserves until the market bounces back, hopefully later in the year.
And what if your client already took their distribution in 2020? Those RMDs can still be put back into an IRA in what is called an indirect rollover, provided you do so within 60 days and haven’t made any other indirect rollovers in the past year (and don’t intend to do so with any of their IRAs in the next year). If the 60-day rollover period has expired, then under the CARES Act, a penalty-free rollover can still be completed anytime for the next three years from the date the distribution was received (if the client can satisfy the very liberal standard for a Coronavirus Related Distribution).
And although there is an RMD holiday for beneficiary IRAs, be careful as these strategies to replace already taken RMDs discussed in the previous paragraph don’t seem to apply to RMDs already taken from beneficiary IRAs. Subtle distinction here.
- Action items: Think about RMDs in a strategic way. Perhaps stop the systematic distribution if your client does not need those payments. Also consider whether the RMD reprieve allows additional tax planning opportunities, whether through performing Roth conversions or doing distribution planning in some other way? Also consider helping those clients who already took their RMDs and may want to “give them back” to replenish their IRA accounts.
2. Make sure clients know their options when seeking relief from debt obligations
Many of your clients may be experiencing a cash crunch, so help them thoughtfully assess their options. Many credit card companies are offering forgiveness, mortgage companies are foregoing interest, student loan forgiveness is available (1-800-4-FED-AID), and clients could take a loan against their investment accounts.
The FHA has imposed a 60-day foreclosure and eviction moratorium for single family homeowners with FHA insured mortgages. In a similar move, Fannie Mae and Freddie Mac are suspending foreclosures and evictions for at least 60 days as of March 18. Again, check with your lender.
The CARES Act suspends required federal student loan payments through September 30, 2020 and therefore no interest will accrue on the debt. The act also excludes up to $5,250 from income from any employer payment made to an employee before January 1, 2021 for purposes of student debt payments.
You can see that there is plenty going on here between the stimulus benefits and private efforts, so take the time to research every debt that the client has to understand their options. It is better to do your research here than allowing your client to make late payments or default when other options are only a phone call away.
- Action items: Do your research and exhaust all options in connection with mortgages, student loans, other lenders and credit card companies.
3. Discuss penalty-free withdrawals from qualified retirement plans and IRAs
The CARES Act provides tax relief for retirement plan and IRA “coronavirus-related distributions” up to $100,000 taken by individuals on or after January 1, 2020 and before December 31, 2020. The CARES Act permits in-service distributions, provides an exception to the 10% early distribution penalty, exempts the distribution from the mandatory 20% withholding applicable to eligible rollover distributions, allows the individual to include income attributable to the distribution over a three-year period and allows for the recontribution of the distribution to a plan or IRA within three years (and taxes already paid can get refunded).
Distributions will be included in gross income over three years (although you can proactively elect to include all income in 2020, which may make sense for some people), but taxes will be spread over a three-year period. Distributions also may be recontributed within three years of withdrawal and then your client can file an amended return to obtain the refund of any taxes paid. In effect, the law allows you to borrow up to $100,000 from your IRA (or any combination of IRAs) and repay the amount anytime up to three years later with no federal income tax consequences.
And there are no limitations on what you can use the funds for. You can use the money to pay bills, help your adult children, pay down your loans or whatever you like and then repay the money within the next three years. You could even technically take that money and invest it in the stock market, although you would need to consider whether that makes sense given that the money needs to be repaid which could trigger taxable gains. In any event, it is essentially an interest free loan for three years.
- Action items: Make sure your clients who need cash are aware of the penalty-free withdrawals now available to them and the extended option to repay the monies back.
4. Qualified plan loan provisions are also liberalized
The CARES Act also liberalizes qualified plan loan provisions. Through December 31, 2020, consider taking a loan from a qualified plan up to the lesser of $100,000 or 100% of the vested account balance (they doubled the allowable amount). The due date for any repayment of the loan is delayed for an additonal year (normally five years).
- Action items: Consider whether a $100,000 loan from a qualified plan makes sense given the relaxed terms.
A final note regarding eligibility
To be eligible for the withdrawal and loan relief provided in the CARES Act, an individual must fall within one of the following categories: the individual, her spouse or dependent is diagnosed with COVID-19, or the individual experiences adverse financial consequences as a result of COVID-19, as certified by the employee to the plan administrator. It seems that these provisions will be liberally interpreted.
The CARES Act is providing plenty of financial relief to your clients. The availability of funds from retirement plans presents a huge opportunity for those clients who are in need of cash, but it also creates plenty of confusion. However, they will need you to help them navigate the myriad choices and to also make sure they don’t compromise their long-term plans when making these decisions. Make sure your clients are aware of these choices and help them to assess the best options given their situation.
For a brief one-page summary that could be used for clients, see this CPA Summary of CARES Act (courtesy of my CPA).
For further information, please see The CARES Act Decoded from WealthAdvisor.