Perfect vision. That was supposed to be the theme for 2020, especially when it came to planning and saving for retirement. But in the first quarter of the year, the novel coronavirus hit, and that created confusion and uncertainty when it came to our personal finances.
In March 2020, Congress overwhelmingly passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act - better known as the emergency stimulus package. This over $2 trillion economic relief package was designed to protect the American people from the public health and economic impacts of COVID-19. If you or your family were affected financially by the coronavirus, the CARES Act made it easier for you to withdraw money from your Individual Retirement Arrangements (IRAs) and workplace retirement plans. This relief program also brought about changes in IRA rules, including tax implications for certain retirement account withdrawals and expanded loan options.
Here’s a quick overview of how the CARES Act impacts IRA holders in 2020:
The required minimum distribution (RMD) is amount of money that must be withdrawn from your traditional IRA or Simplified Employee Pension (SEP). The CARES Act suspended all RMDs from retirement accounts in 2020. This allows these accounts (and you) more time to recover from the stock market downturns. Retirees who can afford to leave their retirement accounts alone earn a tax break as they will not be taxed on mandatory withdrawals.
If you took a distribution (up to $100,000) between January 1, 2020 and December 31, 2020, due to COVID-related events, you are not subject to the additional tax on early distributions.
If you took a distribution (up to $100,000) between January 1, 2020 and December 31, 2020, due to COVID-related events, you can recontribute to your retirement account or pay back tax over a three-year period.
Now that you have an overview of how the CARES Act affects your IRAs, here are some strategies you can use to take advantage of these changes.
Reduce taxable income to be eligible for any future stimulus payment. If your adjusted gross income (AGI) is more than $198,000 for joint filers or $99,000 for single filers), you are not eligible to receive a stimulus payment. However, if you withdraw funds from your Roth IRA or other after-tax assets in 2020 - instead of your traditional IRA - you may be able to lower your AGI enough to qualify for a stimulus payment.
Complete an IRA rollover. If you already took your RMD for the year but didn’t need to, you might be able to return the monies to your account by completing an IRA rollover. By rolling over, you’re saving for your future and retirement while your money continues to grow tax-deferred. Refer to IRS Notice 2020-51 to complete your rollover.
Take a distribution and repay over three years. If you have a COVID-related financial need (need being the key word), you have the option to withdraw funds from your IRA or other retirement accounts. Once your financial situation improves, you can recontribute to your IRA or pay taxes over a three-year period. For example, if you took a $15,000 COVID-related distribution in 2020, you could claim $5,000 in income on your next three federal tax returns (2020, 2021, and 2022). However, you do have the option of claiming the full amount on your 2020 return.
Withdrawing funds from your retirement accounts is not a decision that should be taken lightly. Taking funds out early can negatively affect the health of your investment portfolio and may require you to adjust your retirement goals. Consult with your financial advisor before embarking on any of these strategies.
At McHenry Savings Bank, trust is earned. We seek to understand your financial needs and goals. We provide financial solutions designed to meet the needs of our customers - including investment products and services. Visit McHenry Savings Bank to learn how you can save or speak with an expert to discuss your personal financial goals by calling 815-385-3000.