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On Friday, March 27th, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law.
The economic relief package contains provisions related to retirement planning and charitable contributions. Additionally, the Treasury Department and IRS have announced extended deadlines for making tax payments and retirement contributions, affording flexibility to taxpayers in a time of uncertainty. Following are some key financial planning concepts related to the CARES Act, the extended tax deadlines, and some thoughts on legacy planning given the current economic environment.
The CARES Act suspends Required Minimum Distributions (RMDs) for IRAs and qualified plans for 2020. If you are over the age of 70 ½, or if you are the beneficiary of an inherited IRA who receives RMDs, you have become accustomed to taking your RMD each year by December 31st. For 2020, you have the option of taking your payment or not. Two advantages of skipping your RMD are:
If you have already begun receiving monthly payments toward your 2020 RMD, speak to your advisor and tax professional. You may be able to pause payments or return the amount you have received. The option of returning payments already made is not available for beneficiaries of inherited IRAs.
*The IRS released Notice 2020-51 on June 23, 2020, which contains further guidance to the RMD waiver provision in the CARES Act. Now, all RMD payments may be returned, including RMDs taken in January 2020, the total sum of a series of monthly payments taken in 2020, and RMDs taken from inherited IRA balances. Individuals have until August 31st to return payments. Contact your Financial Advisor to learn more.
For those who are charitably inclined, the CARES Act temporarily increases the AGI limit for cash charitable contributions to 100% of AGI. The limit for cash contributions was previously changed to 60% under the Tax Cuts & Jobs Act (2017 tax bill). The CARES provision makes it possible to eliminate one’s tax liability for 2020 entirely. Contributions must be made in cash and cannot be made to a Donor Advised Fund or “supporting organization” (IRC 509(a)(3)). Contributions in excess of 100% of AGI may be carried forward for up to 5 years.
The IRS and Treasury Department have extended the April 15th filing deadline to July 15th. This allows extra time to make 2019 contributions to a Traditional IRA or Roth IRA. The 2019 contribution limit is $6,000 + a $1,000 catch-up amount for those age 50 and older.
With the market drawdown, converting now means less tax due. Additionally, income tax brackets are relatively flat from a historical perspective, meaning individuals in higher brackets are likely to pay less now than they may in the future. Assets grow tax-free and withdrawals are tax-free in retirement. For those younger than 59 ½, contributions can be withdrawn tax-free. For those in RMD status, because RMDs are waived for 2020, no RMD will be required before converting, as is typically the case. Roth IRAs are a great legacy planning asset as well, as Roth balances pass tax-free to heirs, who may allow those assets to grow tax-free up to 10 years (under the SECURE Act) before making withdrawals.
Some final thoughts in the vein of legacy planning. The market drawdown and looming recession represent a window of opportunity to make lifetime gifts at relatively depressed asset values. This can be done via annual exclusion gifts, outright using lifetime exemption, or using leveraged techniques such as rolling 2-year Grantor Retained Annuity Trusts (“GRATs”), a Charitable Remainder Trust, or a sale to a Grantor Trust. Your financial advisor can discuss which of these wealth transfer techniques may make sense for you and your family.
This post was originally published on April 1, 2020 and updated June 23, 2020.