Highlights of the Historic Coronavirus Aid, Relief, and Economic Security (CARES) Act

In an effort to mitigate the effects the ongoing COVID-19 pandemic is having on Americans in every sector of the economy, the federal government signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020. While this historic bill approves a $2 trillion emergency stimulus package aimed at providing broad relief for individuals, businesses, healthcare entities, and state and local governments across the country, below are some highlights of the act that might relate to your personal finances.

Stimulus Checks

The CARES Act provides a refundable income tax credit of up to $1,200 ($2,400 for married couples filing a joint return) against 2020 income. This credit amount is increased by up to $500 for each child a taxpayer has under the age of 17. Notably, the amount you get depends on your adjusted gross income (AGI) on your most recent tax return (2018 or 2019), meaning anyone earning under $75,000 will get the full $1,200, but the payments “phase out” at a rate of $5 for each $100 over the AGI threshold for incomes between $75,000 and $99,000 ($150,000 and $198,000 for married filing jointly). Thus, if you are a single filer and earned $80k in the most recent year for which you filed a tax return, you should expect a check of $950 {Math: $1,200 – [($80,000 – $75,000)/$100 x $5] = $950}.

RMDs Suspended for 2020

Contributing to retirement accounts is generally an excellent way for you to defer taxable income until retirement, especially if you are in a higher marginal tax bracket. The reason for this is most people find themselves in a lower tax bracket during retirement, due to no longer earning a steady paycheck. However, the IRS only allows you to defer that income until a certain age, then it requires you to begin distributing a certain portion of your retirement accounts each year, aptly named a required minimum distribution, or RMD.

When the SECURE Act was signed into law at the end of 2019, the age at which you were required to take an RMD was changed from 70 ½ to 72. Now, in response to the ongoing pandemic, the CARES Act suspends this requirement for anyone who was required to take one in 2020, eliminating what is, for many, a sizable taxable event, as each dollar you distribute from a retirement account normally gets added to your earned income. Additionally, if you already processed your RMD for the year, you may have the option to “undo” the distribution by redepositing the money (plus any taxes withheld at the time of distribution) into the account, essentially processing at 60-day rollover to avoid the tax liability.

Hardship Withdrawals & Loan from 401(k) Plans

Typically, if you withdraw money from a retirement plan before you turn age 59 ½, you are forced to pay a 10% early withdrawal penalty (in addition to adding the amount of the withdrawal as income on your tax return). However, if the withdrawal meets certain “hardship” criteria, such as mental or physical disability, the penalty is waived. The CARES Act temporarily loosens the rules on hardship distributions from retirement accounts, giving people affected by the COVID-19 crisis access of up to $100,000 of their retirement savings without the usual 10% penalty. The withdrawal will not include mandatory tax withholding and can either be repaid over three years or be taxed over three-year period.

The law also doubles the amount 401(k) participants can take in loans from an account for the next six months (through 9/30/20) to the lower of $100,000 or 100% of the account balance. IRAs don’t permit loans. It is important to note each retirement plan comes with its own set of rules for loans and hardship withdrawals, so be sure to check with your plan administrator to understand the rules specific to your plan.

The information presented in this article is for educational purposes only and is not meant to provide individual advice to the reader. There is no guarantee the information provided above relates to your personal situation. All financial situations are unique and should be advised as such.

Adam Oerther

Author

Adam Oerther