By Nicole Sullivan, CFP®, RMA, Director of Financial Planning
The Coronavirus is significantly impacting households of all wealth levels. For some, it might be as minor as social inconveniences. But for many, the economic impacts are truly significant. On March 27, 2020, the bipartisan CARES Act was signed into law. This law provided the single largest stimulus package ever approved by Congress. Beyond government offerings, we wanted to share several potential financial relief ideas you can consider during the COVID-19 pandemic:
(1) Permitted to Withdraw Up To $100,000 from an Eligible Retirement Plan for Coronavirus-Related Hardships
As a rule of thumb, it’s typically frowned upon to take a premature distribution from a retirement account. Why? To start, any person who withdraws from a qualified retirement account needs to pay income tax on the distribution. In addition, however, if you’re under age 59 ½, you’re subjected to a 10% early withdrawal penalty.
This rule of thumb has changed a bit in recent days, especially if you really need the money. This is because Congress has permitted up to $100,000 in Coronavirus-related distributions and waived the 10% early withdrawal penalty. Moreover, the income tax to be paid on those distributions can be spread over a three year period, 2020 – 22 As well, should your financial situation improve, you can recontribute your withdrawals back into a tax-deferred retirement account and not have to pay the income taxes. It would be a great idea to consult your tax professional before you proceed with this withdrawal, especially if you intend on playing tax games with spreading a repayment out over several years.
What’s the “catch?” There are multiple. First and foremost, you must be impacted by the Coronavirus for this distribution to work. This means that you, your spouse, or dependent caught the disease, or you experienced adverse financial consequences because of the disease (laid off, furloughed, closed business, reduced hours due to catching the disease or quarantine). Make sure you consult with your accountant before proceeding with this withdrawal, as he or she will need to help track it during tax time next year.
A second “catch” is that this is not “free” money – you’re taking a loan from yourself, that you’ll need to pay taxes on if not repaid. Finally, you’re borrowing from your own retirement. When you saved these dollars at the onset, the goal was for them to be used at retirement. While we are certainly living in unprecedented times, and this represents a solid safety net – don’t withdraw from your retirement unless it’s absolutely necessary.
(2) Delay Your RMD
That’s right, if you’re over 70 1/2, required minimum distributions are not required for 2020. If your RMD was taken between February 1 – May 15, you can recontribute the funds back into your qualified retirement account (and thus you would not have to pay taxes on the distribution). However, if a distribution was taken in January 2020 to satisfy a 2020 RMD, one cannot recontribute it.
As a note – this rule applies to many RMD requirements for the year 2020. Therefore, if you were required to take a RMD in 2019 and delayed until 2020, you must still take it.
One final consideration – 2020 RMDs are cancelled for inherited IRAs. However, if you withdrew more than 60 days before initiating the recontribution, you are not eligible to “undo”. Inherited IRAs have some specific nuances as it relates to this rule, and it’s important to consult a tax professional or financial advisor to discuss your circumstances.
(3) Donate to Charity, Regardless of Your AGI
Prior to 2018, charitable donations were tax-deductible as itemized deductions. After the Tax Cuts and Jobs Act became law in 2018, however, it became more advantageous for nearly 90% of taxpayers to claim the standard deduction instead of itemizing. This meant that donations to charity were no longer deductible for those households. However, the CARES act has provided a new incentive to donate, regardless of if you itemize or not. If you give up to $300 to charity, you can write the gift off as an above the line deduction. There are many nonprofits who could use financial assistance during the pandemic, and the CARES act has provided a further incentive for you to help. Make sure to save your receipts!
(4) Review Your Fixed Expenses and Contact Servicers.
With the world at a standstill, it’s no surprise that your household expenses have likely dropped. If you’re looking for ideas on how to save even more, we encourage you to revisit your automatic expenses and consider downgrading or cancelling. As an example, perhaps a pre-tax transit pass could be temporarily suspended if you’re now working from home. You could also negotiate with say a phone provider to make sure you’re not paying for services that you don’t need, or reduce a package. Even saving a few dollars here or there can add up. Finally, if it comes down to it, many landlords, loan servicers, and utility providers are being especially understanding during this trying time. Reach out and explain your hardships and hopefully they will be able to help you. It’s best to be proactive and communicative.
If you have any other COVID-19 specific savings ideas, make sure to let us know. Feel free reaching out at [email protected].