COVID-19 Emergency Response Legislation to Ease Strain on Personal Finances

The $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act) recently signed into law by President Trump brings much needed financial relief to American individuals and families. In addition to the direct rebates individuals and families will be receiving over the next few weeks, the CARES Act includes several measures that provide Americans with more flexibility in using their retirement plans to shore up their personal finances.

Tax-Favored Coronavirus-Related Distributions from IRAs and 401(k) Plans

If you have an IRA or 401(k) plan and are adversely affected by the coronavirus, you may be eligible to take a tax-favored coronavirus-related distribution of up to $100,000. You can use the money for any purpose and, when your financial situation improves, you can recontribute it back to your retirement plan.

If you recontribute the distribution back to your IRA within three years of the date of withdrawal, it will be treated as a tax-free rollover. Otherwise, it will be taxed as ordinary income. And, if you under age 59 ½, the dreaded 10% early withdrawal penalty does not apply. This only applies to distributions made between January 20 and December 31, 2020.

Temporary Waiver of Required Minimum Distributions (RMD)

If you are age 72 or older, you don’t have to make a withdrawal from your retirement plan by April 1 if you don’t need to. Under RMD rules, individuals age 72 or older are required to withdraw a portion of their retirement assets each year so they can be taxed. By eliminating the requirement for this year, individuals who don’t need to make a withdrawal can avoid having to sell assets that have declined in value due to the stock market crash. Instead, they can allow their money to recoup losses as the stock market recovers.

This is significant because your RMD for 2020 would have otherwise been based on your account value at the end of 2019 when the Dow Jones Industrial Average (DJIA) closed at 28,462. As of March 30, the DJIA is down below 23,000. It would have meant taking a withdrawal and paying taxes on a higher percentage of your IRA or 401(k) balance. Now you can delay the distribution to next year.

Above-The-Line-Charitable Deduction

To spur charitable giving during this difficult time, the CARES Act allows taxpayers who don’t itemize to deduct up to $300 in charitable deductions. The deduction can be taken “above the line,” which means anyone who files taxes can take the deduction against their income.

Delayed Tax Filings

The Treasury Department has postponed the tax filing deadline to July 15. You now have three extra months to prepare your returns and pay any taxes owed. You can still file for an extension to October 15, but you need to pay taxes owed by July 15 to avoid penalties and interest.

Extended Deadline for 2019 IRA and HSA Contributions

With the extension of the filing date for tax returns to July 15, 2020, taxpayers also have an extra three months to make their 2019 IRA and Roth IRA contributions. For any contributions you make after April 15, you will want to make sure your custodian records them as 2019 contributions.

The extended tax filing deadline also applied to 2019 contributions to Health Savings Accounts, Archer Medical Savings Accounts, and Coverdell Education Savings Accounts.