By Sam Miller, CFA®, CFP®, CAIA®
Senior Investment Strategist
In response to the ongoing COVID-19 global pandemic and corresponding economic fallout, the Coronavirus Aid, Relief, and Economic Security (CARES) Act rolled through Congress and was signed by President Trump on March 27th. Totaling $2 trillion, the CARES Act represents the largest stimulus package in modern history. The new legislation includes several relief provisions that offer immediate benefits to both individuals and businesses. The following provides a quick overview of the most noteworthy highlights from the 880-page document:
The headline feature of the CARES Act is direct payments to taxpayers. Individuals earning less than $75,000 ($150,000 for couples) based on 2019 adjusted gross income will receive direct payments of $1,200 ($2,400 for couples), plus an additional $500 per child. However, these payments will be reduced for individuals with income over $75,000 (couples with income over $150,000) and go away completely for individuals with more than $99,000 of income (and for couples filing jointly with more than $198,000 of income).
Required minimum distributions (RMDs)
RMDs are suspended for 2020. This applies to Traditional IRAs, SEP IRAs, and SIMPLE IRAs, as well as 401k, 403b, and 457b plans. Additionally, individuals who turned 70½ in 2019, but didn’t take their first RMD in 2019 (these people are normally required to take this distribution by April 1, 2020) do not have to take either their 2019 or 2020 RMDs. What’s the logic? RMD amounts are calculated based on account value as of the previous year-end. Given this year’s steep stock market decline thus far, retirees would be forced to remove a larger percentage than normal from their account. Congress realized this and is allowing retirees to keep those assets in place instead of potentially selling at a low point in the market to fund RMDs.
Implications: While it usually makes sense to keep assets in a qualified account as long as possible, it may make sense to take your RMD (and possibly more) if the effects of the pandemic have temporarily dropped you into a lower tax bracket.
Hardship withdrawals and loans from retirement accounts
The new Act waives the early distribution penalty of 10% on up to $100,000 of 2020 distributions from IRAs and company plans for “affected individuals,” defined as those (or a spouse/dependent) that have contracted COVID-19, or those that have lost a job or been furloughed or otherwise suffered a heavy financial burden because of the pandemic. Tax will still be due but can be spread evenly over three years, and the funds can be returned to the account over the three-year period, with such redeposits not subject to annual contribution limits. Additionally, the bill increases the limit on loans from certain retirement plans from $50,000 to $100,000 and allows borrowers to skip payments for 2020, extending the time over which the loan must be repaid.
Implications: While the penalty waiver is helpful, withdrawn assets will still be subject to tax and reduce critical funds that earmarked for retirement. Just because you can make a withdrawal from your retirement plan does not mean you should take one. In order to keep your retirement plan on track, this should probably only be used as a last resort.
The new rules ease the process for applying for unemployment benefits and eliminate waiting periods so benefits can reach affected workers more quickly. Included in this is a $600/week increase in benefits for up to four months. Additionally, workers who are not typically eligible for unemployment insurance (e.g., those who are self-employed or independent contractors) are now included.
Federal student loan payments can be deferred through September 30, 2020. During this time, interest will not accrue. The law also includes an opportunity for employers to aid employees who are paying down student debt. Generally, any amounts paid by an employer which are used to pay student debt are considered compensation and are subject to income tax. However, employers have through the end of the year to provide employees with up to $5,250 for purposes of student debt payments and exclude those amounts from taxable income.
Implications: This creates a great opportunity for those with student loans to redirect monthly payments into an investment or retirement account to potentially participate in a market recovery.
Help for small businesses
The bill includes $377 billion in loans and grants to small businesses with up to 500 employees. Emergency SBA 7(a) loans of up to $10 million (depending on payroll costs and other factors) are available to help cover payroll, operations and debt servicing and these loans would be eligible to be forgiven for employers who maintain March 1, 2020 employment levels through June 30, 2020.
An additional $10 billion in Economic Injury Disaster Loans (EIDLs) will be available to help cover immediate, short-term cash needs with creditworthiness requirements eliminated. This provides business owners with an opportunity to quickly access cash (up to $10,000) within three days to cover critical expenses. Beyond these, businesses will be able to delay the employer’s portion of Social Security payroll tax until January 1, 2021.
The CARES Act amounts to one of the largest economic plans to ever come out of Congress and provides much-needed assistance to those affected by the pandemic and the resulting economic damage. Ultimately, it’s effectiveness in rescuing the economy will be debated at a later date. Make sure to speak with your advisor about opportunities resulting from the Act and how it might impact your financial or investment plan.
Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc., nor its registered representatives, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice. Securities offered through Royal Alliance Associates, Inc. member FINRA/SIPC. Investment advisory services offered through SIA, LLC. SIA, LLC is a subsidiary of SEIA, LLC, 2121 Avenue of the Stars, Suite 1600, Los Angeles, CA 90067, (310) 712-2323, and its investment advisory services are offered independent of Royal Alliance Associates, Inc. Royal Alliance Associates, Inc. is separately owned and other entities and/or marketing names, products or services referenced here are independent of Royal Alliance Associates, Inc.