CARES Act and SECURE Act Recap

 In Planning Insights, Strategy Updates

Important Legislative Updates Possibly Affecting You and Small Businesses

As a nation, we have seen substantial law changes affecting individuals and small business owners between the SECURE Act signed into law on December 20, 2019 and the CARES Act which was signed into law on March 27, 2020.

The SECURE Act, which was considered one of the largest retirement reforms to impact the economy, made several changes to many well established retirement laws. The CARES Act was quickly enacted in response to the halting US economy set off by the COVID-19 pandemic. The federal government passed a massive emergency funding bill to protect and support American businesses and individuals.

Though we have sent previous messages about both pieces of legislation and how they might affect you individually, we thought a reminder might be helpful.

Some SECURE Act highlights include:

Elimination of the “Stretch IRA”

Before the passage of the SECURE Act a non-spouse beneficiary of an IRA could “stretch” required annual distributions over his or her lifetime. This was particularly beneficial for younger beneficiaries as the payout period might stretch over decades – thus allowing the payment of income taxes on these distributions to be spread out over a longer period. The SECURE Act eliminates Stretch IRAs as an estate planning tool.

Effective for IRAs inherited after December 31st, 2019, funds must now be fully withdrawn within 10 years, beginning the year after the account owner’s death. There are no longer any annual required minimum distributions – you simply must empty the account by the tenth year. This allows a beneficiary to employ some tax planning when determining which years a distribution could potentially push them into a higher income tax bracket. If you are already taking required minimum distributions from an inherited IRA, this change does not affect you.

Raising the Age for Required Minimum Distributions

When you contribute money tax-free to a traditional IRA, the Federal government mandates that taxable distributions must begin when a certain age is reached. The SECURE Act pushes that age from 70½ to age 72 for everyone born on or after January 1st, 1950. This will allow individuals to keep funds in their IRA accounts for longer. Additionally, it may allow for more years of low-income individuals to consider Roth conversions for their IRA accounts.

It is important to note that even though the age to start taking Required Minimum Distributions has increased, the age to start making Qualified Charitable Distributions (QCDs) remains 70½. If you are age 70½ or older, you are permitted to donate up to $100,000 in tax-free distributions to qualified charities beginning the day you turn 70½. Remember that if you make a QCD even one day before you turn 70½, it will be treated as a taxable event. Please reach out to your Main Street Research planning team to review QCD requirements and eligibility.

IRA Contributions Beyond Age 70½

As we continue to live longer, an increasing number of individuals now work past their full retirement age. Under the SECURE Act an individual can continue to contribute to their traditional IRA past the age of 70½ as long as they have earned income. This will align the rules for traditional IRA accounts more closely with 401(k) plans and Roth IRAs.

The CARES Act will provide meaningful relief through some highlights below:

Suspension of RMDs for 2020

If you take Required Minimum Distributions (RMDs) from your retirement accounts or inherited IRAs, you can suspend those RMDs for 2020 if you prefer not to withdraw funds in a down market or simply prefer not to pay taxes on those distributions. If you have already taken a distribution from your IRA in 2020, you may be eligible to roll the funds back under a 60 day roll back provision just so long as the funds were withdrawn February 1, 2020 or later. Please note, inherited RMDs are not eligible for this roll back provision. Please contact us ASAP if you wish to postpone your RMD or roll any distributions back, however if you have already contacted us, there is no need to reach out a second time.

At the present time, RMDs from defined benefit plans are not currently eligible for the 2020 RMD waiver, but we would recommend holding off on taking these until closer to the end of the year in the event that legislation is passed to include them.

Possibly Look for a Relief Check

If you earn less than $75,000 as a Single Filing taxpayer or $150,000 as Married Filing Jointly taxpayers, you are eligible to receive direct payments of $1,200 per adult and $500 per qualifying child.

Delayed Tax Payments

Federal estimated tax payments originally due April 15th and June 15th are now due July 15th.

Coronavirus Related Distribution Exception

A coronavirus-related distribution is one that is made after January 1, 2020 and before December 31, 2020 for an individual or their spouse who is diagnosed with COVID-19 or if they experienced adverse financial consequences caused by the coronavirus, such as being laid off, having hours reduced, being quarantined or furloughed.

Up to $100,000 can be withdrawn from an IRA account and withdrawals are exempt from the 10% penalty tax if the distribution is taken before age 59 ½. A retirement plan can rely on a participant’s written statement that he or she meets the conditions.

The distribution will be automatically spread out over the next three years from a tax perspective. However, you can opt to treat the entire distribution as taxable in 2020.

This distribution can come from an IRA, which typically does not allow plan loans. You can repay the coronavirus-related distribution for up to three years after the day of distribution.

We hope you are all staying safe and healthy. Please know that we are here to answer any questions you may have about either law. If you have previously contacted us about making changes to your RMD, it is not necessary to contact us again. However, if you have not had a chance to contact us and would like to make a change to your RMD or QCDs for 2020, please feel free to reach out to us.

Your Main Street Planning Team