CARES Act - Major Changes to Retirement Accounts

There are several new relief provisions that most individuals can benefit from immediately. Here are the highlights of the most recent tax changes found in the “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act), which was signed into law on Friday, March 27.

Extended deadline for 2019 IRA contributions Now that the Treasury has extended the tax return filing date to July 15, 2020, from April 15, 2020, the date for making 2019 IRA and Roth IRA contributions is also extended to the same date.

In addition, the extended deadline applies to 2019 Health Savings Account, Archer Medical Savings Account, and Coverdell Education Savings Account (ESA) contributions.

Required Minimum Distributions (RMDs) Waived for 2020 The CARES Act provides retirees the waiver of RMDs for 2020. If you do not need the funds, you will not be required to take any.

What it means for 2019 RMDs not yet taken The RMD waiver also applies to 2019 RMDs that are normally due by April 1, 2020 for those turning 70 ½ in 2019. Unfortunately, the ability to benefit from this change comes too late to enact for most retirees.

IRA Beneficiaries subject to the 5-year rule A less-obvious group that can benefit from this waiver are beneficiaries who inherited in 2015 or later and who are subject to the 5-year payout rule. You are now allowed to skip the 2020 distribution, effectively making the rule a 6-year rule.

Can you undo RMDs already taken? One question is whether 2019 or 2020 RMDs already taken in 2020 can be put back in the IRA and have the tax bill eliminated. The answer is, maybe. Most likely it would have to be done within 60 days of the distribution.

Additional relief provisions for retirement accounts The new act waives the 10% early distribution penalty on up to $100,000 of 2020 distributions from IRAs and company plans for “affected individuals”. The tax would be due, but could be spread evenly over three years, and the funds could be repaid over the three-year period.

Finally, the new law affects company plan loans taken by affected individuals. First, it increases the maximum amount of plan loans to the lesser of $100,000 (reduced by other outstanding loans) or 100% of the account balance. [The usual limit is the lesser of $50,000 (reduced by other outstanding loans) or 50% of the account balance.] This rule applies to loans taken within 180 days from the bill’s date of enactment. Second, any loan repayments normally due between date of enactment and December 31, 2020 could be suspended for one year.

Please contact LVM Capital Management, Ltd (269-321-8120) if you have questions about the CARES Act. LVM does not provide tax preparation services and clients are urged to contact their tax preparer as well as LVM to review their specific circumstances.

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