When our $21 trillion economy comes to a screeching halt, there’s going to be an economic contraction. That’s what we’ve all been experiencing the past couple of months as we deal with the Coronavirus.
The Federal government’s $2 trillion fiscal rescue act is part of extraordinary measures attempting to limit the impact to our economy. The Coronavirus Aid, Relief, and Economic Security Act (aka CARES Act) was passed to help support individuals and American businesses who have been hurt by the outbreak.
It’s massive. Just take a look at what is in this thing!
Here are some of my biggest takeaways from the CARES ACT that could potentially affect you as well as your retirement planning:
One-time Cash Payment
Taxpayers are eligible for a one-time direct deposit of up to $1,200 per adult ($2,400 per couple) plus $500 per child under age 17. There are income limits, and I would check out this calculator to see if you qualify. If you have filed your 2019 taxes already, the IRS will use that income to calculate your payment; if not, they’ll use your 2018 tax filing. Didn’t get yours yet? Check the status of your payment here.
The goal of the government putting money in the hands of consumers is that they will save it or spend it. Don’t feel like you need the money? I already know people who have given their money to charity, local businesses, or other people in need. Maybe you will want to do the same.
Better Unemployment Benefits
The Act will extend and expand unemployment insurance through Dec. 31. Eligible workers (now including self-employed, independent contractors, and gig economy workers) will receive an extra $600/week for four months, on top of what they receive from state unemployment benefits.
As humbling as it may be to file for benefits if you are furloughed or unemployed temporarily, it can help make ends meet. Ironically some workers are finding that they are getting paid more over these next couple of months, and it’s yet to be seen how motivated they will be to go back to work!
Early Withdrawal Penalty Waiver
The Act waives the standard 10% early withdrawal penalty for eligible coronavirus-related distributions from retirement accounts (retroactive to Jan. 1). You’ll still pay income taxes on withdrawals, but you can spread them over a three-year period or use that time to roll the distribution back over. You can even re-contribute them if your financial situation gets back to stable footing.
While this is an added lifeline, in my opinion, this should only be used as a last resort. Even if you intend to pay it back to your retirement account, the reality is most people won’t. Not to mention, who is going to want to file an amended return two years from now to be able to add it back in?
2020 RMDs Have Been Suspended
You won’t have to take a Required Minimum Distribution from your IRA or 401(k) this year, leaving you in control of how much you withdraw. If you already took your RMD for 2020, you have several choices: keep it and pay taxes on it, return it to your IRA as an indirect rollover, or convert the amount into a Roth IRA (Roth conversions are permanent).
This RMD waiver is a huge relief for people who would otherwise owe tax on a value that has diminished. I like this because essentially the IRS is providing more breathing room for taxpayers.
The Act has brought back a line item to deduct charitable deductions! A couple of years ago, the TCJA tax changes made it harder to deduct charitable contributions. Now, the IRS has added it back in so that itemize or not, everyone can deduct up to $300 annually should they donate to charity.
Last year more than 90% of Americans used the standard deduction. So for those of you who no longer itemize and made less charitable donations because of that – it’s time to start gifting again!
There is a lot more in the hundreds of pages of the CARES Act. The ramifications of the document will undoubtedly affect your life, both now and in the future. It will certainly provide relief to American businesses and individuals and it could affect your financial plan too.
Haven’t talked to your financial advisor lately? Now would be a great time to connect with him/her. If nothing else, learn how your particular situation may be impacted.