What Matters Most – CARES Act Impact on Retirement Accounts with Brian Boal
In this episode, we talk to Brian Boal, CPA regarding the CARES Act Impact on Retirement Accounts, along with listener questions regarding stimulus payments and student loans! This episode is full of the latest and most helpful information regarding these changes and how they might impact you. Contact Brian at email@example.com or by visiting boalandassociates.com
Male: Welcome to the “What Matters Most” podcast presented by First United Bank & Trust. That’s My Bank. Visit us today at mybank.com.
Eric: Hello. And welcome to “What Matters Most,” a podcast all about finances, community, savings, and security for you, your family, and your business. This podcast is brought to you by the helpful folks at My Bank, First United Bank & Trust. I’m your host, Eric Nutter. And in today’s episode of “What Matters Most” is the impact of the CARES Act and its new tax laws on retirement accounts. And for this discussion, I am thankful to be joined remotely again today by Brian Boal, CPA, principal, and founder of Boal & Associates, an accounting firm in Oakland, Maryland specializing in tax planning and consulting. Hey, Brian. How’s it going?
Brian: Good, Eric. How are you this morning?
Eric: I’m doing real well, doing real well. Thanks for asking. I appreciate you coming on today. I know we’ve got a full topic to talk about today and I’m excited to have you here. So I just want to get right into it because we got a lot of questions to talk about here. So Brian, on March 27th, the president signed the CARES Act, the Coronavirus Aid, Relief, and Economic Security Act into law. There were a bunch of sections in that act that related to retirement plans. Would you mind explaining to our audience what those changes were? What changes were made to retirement plan withdrawals or the plan overall? How did that affect retirement?
Brian: Sure thing. There were a lot of changes, Eric. And really, I think Congress recognized the fact that when the corona crisis started, obviously the stock market took a significant hit. Now, it’s obviously climbing back at this point but Congress did recognize that some changes may need to come about because of the adverse consequences that took place in the market. So what they did is they went out…and obviously, if you have an IRA, most folks know that once you reach what used to be age 70-and-a-half, and I’ll touch on that in just a minute, you’re required to take a minimum distribution each year from your IRA.
What Congress did is they went out and they suspended the RMD requirement for 2020. So no RMD is required from your IRA for the entire year of 2020 or from your…I should say IRA or your qualified plan. Additionally, prior to the COVID crisis, Congress…the Secure Act had been introduced where the RMD age was actually raised from 70-and-a-half to age 72. So again, in 2020, there’s no requirements to take a distribution from these plans, but the age for the required minimum distribution was raised from 70-and-a-half to 72.
Also, an additional item that came about, Congress then eliminated the 10% penalty on a premature distribution. So typically if you’re under age 59-and-a-half, and you take a retirement plan distribution, you’re subject to a 10% penalty for this premature distribution. Congress did waive that 10% penalty up to a $100,000 distribution from your plan on what they’re calling coronavirus payouts. Now the question is, you know, what is a coronavirus payout? And our understanding of that is that you, a spouse or dependent was diagnosed with COVID-19 or that you or a spouse have experienced adverse financial consequences from being quarantined, furloughed, laid off, having your work hours reduced or being unable to work due to the lack of childcare.
So there’s various, you know, items that fall into this bucket. I would encourage anyone that’s considering taking this type of distribution to speak with their financial advisor, make sure that you can qualify for one of these, you know, coronavirus payouts prior to taking the distribution. Also, in addition with these distributions, the funds can be paid back, they’re treated as a tax-free rollover and can be paid back over a three-year period or if you intend to pay the tax on the distribution, in other words, keep the money, the tax can be spread over a three-year period. Again, these are very complicated, you know, very specific, you want to make sure, you don’t want to take these distributions without consulting your financial advisor first.
Eric: Right. But it gives people several options for accessing their funds without penalty or whatever so they can use those if they’re in a tough spot.
Brian: It did. Congress recognized that, you know, a lot of folks need money right now because of the consequences that have taken place maybe with their business or their family circumstances in the past few months, so they did ease up the rules to allow you to access your retirement fund.
Eric: Got you. Okay. Well, along those same lines, so what about plan loans? Like I understand the CARES Act allows for enhanced retirement plan loans. Were there any changes to that? Or how does that work?
Brian: Yeah, that’s correct. So some 401(k), some qualified plans with your employer allow you to take a loan upon your retirement fund, let’s say from your 401(k). Congress increased the limit from what typically was $50,000 up to the lesser of $100,000 or 100% of the account balance up until September 23rd. Repayments, so once you take a loan from your retirement plan, you do have a requirement to make monthly payments back to the plan, typically over a five-year period. Congress also eliminated the payments on that loan for up to one year, these distributions must be taken prior to September 23rd.
Eric: Okay. All right. What are your thoughts on that? Is it a good idea? Should people take loans against their 401(k)?
Brian: That’s a great question, Eric. And it’s not always the right circumstance to do that. Again, you want to talk to your financial advisor prior to pulling the trigger on a distribution or what I’ll call a loan in this manner. Because if you think about it, our markets, if they’re going up, if you’re taking that loan from your plan, you’re taking the money out of the plan at that point, so you may miss out on some of the tax-free growth that you would get within your retirement plan while you have that loan out. So definitely I’d encourage everyone to speak with their financial advisor prior to making a loan such as this.
Eric: Got you. Okay. So for those who are retired, so the required minimum distribution change that you talked about, so let’s go a little more deeply into that. So you talked about the age moving, right? So it got pushed back a little bit, so what effect does that have on our retired listeners?
Brian: Yeah, so it just gives everybody, it gives folks a little more time to not be required to take that minimum distribution, it gives them a little more time for their account to grow. Instead of having to take that distribution at age 70-and-a-half, they can wait until age 72 in order to take the distribution. Now, keep in mind that once someone turns 59-and-a-half, they can take a penalty-free distribution from their account at any time. This just gives us folks that really don’t need the money, that want it to continue to grow tax-free, or want it to continue to grow for their heirs to leave it in the account and not take a distribution until age 72.
Eric: That’s interesting. Just considering every other piece of the plan was sort of wrapped around getting people money and this particular piece was sort of to push back and allow it to grow longer, so I just thought that was interesting.
Brian: That’s correct. And keep in mind that this piece of it, the increase in the age limit to 72 was through the Secure Act, which actually came out prior to the CARES Act and prior to the COVID crisis.
Eric: Got you. Got you. So what about contributions? So are there any extensions in terms of contributions for 2019 even though we’re past that April 15th date?
Brian: No, that’s a great question, Eric, and yes. So the tax deadline was extended from April 15th to July 15th automatically. And when that took place, you know, the contributions for traditional or Roth IRAs, the deadline was also extended from April 15th to July 15th, so folks can still make those contributions up July 15th.
Eric: Got you, July 15th. Okay. And that’s Roth and traditional?
Brian: Roth and traditional and that actually also includes health savings accounts.
Eric: Oh, okay. All right. So health savings accounts are moved to July 15th as well for the prior year.
Brian: That’s correct. HSAs or health savings accounts typically have the same tax deadline, the April 15th deadline, those were extended as well until the July 15th date.
Eric: Okay. As far as Roth IRAs are concerned, are Roth IRA conversions a potential option these days?
Brian: Yeah, Roth IRA conversions are certainly a potential option these days, you know, again, I wanna mention that that’s something that you should always speak to your financial advisor on because there are tax consequences to doing that. But something you want to think about right now with Roth IRA conversions is in the current climate if you have depressed assets in a traditional IRA that have decreased during this corona crisis that we’re expecting, you know, may have some potential appreciation in them, if you can convert them now from a traditional IRA to a Roth IRA, you’re converting them at that depressed value. Then that growth, if the growth were to take place, would take place in a Roth IRA which can permanently convert those into tax-free growth. So it is something that folks are considering these days but certainly, definitely talk to your financial advisor prior to going into a Roth IRA conversion because there are tax consequences and there are, you know, reasons that an advisor may advise against a Roth IRA conversion but it is definitely something to consider right now.
Eric: Got you. Does that advice or that line of thinking for everything we’ve just discussed, does that only apply to right now in 2020? Or how does that work for you?
Brian: No, it’s a great question at any time. There are lots of reasons to do Roth IRA conversions because again, once an asset moves from a traditional IRA to a Roth IRA, any growth that takes place within the IRA can potentially be tax-free forever. It’s all about tax brackets and planning with your CPA and with your financial advisor to see, you know, if you have a certain amount of room left in a lower tax bracket and you have a traditional IRA, it may make good sense to go ahead and convert that traditional IRA into a Roth to the extent that you have room in that lower tax bracket. So there are lots of good reasons to do that not just in a corona time period, but again, just speak to your financial advisor prior to pulling the trigger on that.
Eric: Right. So there’s one that I thought as we were talking about required minimum distributions, so let’s say someone already took their required minimum for this year and then, you know, laws change, things get pushed back, can they give the money back or is there a best practice for them to follow with that change happening kind of in the middle of them taking the funds?
Brian: That’s a great question, we’ve had a lot of this, this year. So a lot of folks do take their distributions early in the year or over the course of the year in a monthly distribution, so yes, the answer is yes. So if you took your distribution in February or March, the IRS actually extended the 60-day rollover period. Typically you take funds out and put them back within 60 days, and it was treated as a tax-free rollover. The IRS did extend that period on those 60-day rollovers. So now, if you took your distribution in February or March, you can actually return it between now and July 15th and it’s treated as if it never took place.
January is a little bit different because January does fall outside that 60-day rollover period that Congress allowed for, however, there are options in which if you took your RMD in January, and again if you were directly impacted by COVID as we discussed earlier, which, you know, has a variety of different buckets that you can fall into but if you experienced adverse financial consequences through COVID there may be an option to put that January RMD back as well. But again, you’d want to speak with your financial advisor directly on that, make sure that you can qualify for those rules.
Eric: Awesome. Well, Brian, before we get to some listener questions, and we have several, before we get to those, do you have any final thoughts, wrap-up thoughts about IRAs and the changes that we’ve seen?
Brian: Well, there have been a lot. As we just discussed, there have been a lot of changes, a lot of complications involved. So I guess, you know, number one, you want to look at your account, you want to see what impact the coronavirus has had on the value of your account. And if there has been a decrease in value, certainly that provides you with some options that may help to put some funds back in, to let them grow back to where they were. But again, everything that you do because of the complications of these rules, I would highly consider that you speak with your CPA and with your financial advisor prior to making any decisions on the IRAs.
Eric: Yeah, good advice. All right. So let’s get to some listener questions. So as a reminder, you can always submit your questions by visiting mybank.com/podcast, or by emailing us directly at firstname.lastname@example.org. So Brian, we’ve got several and we’re gonna bounce around a little bit, it’s not all IRA related.
Eric: So one question right off the bat is have tax deadlines changed from July 15th?
Brian: They have. Well, from April 15th to July 15. So as of right now, things are still July 15th. There have been some rumors out there that that date may go out a little bit further but as we sit right now, the April 15th date automatically became a due date of July 15th.
Eric: Okay. All right. So do you have any expectation of knowing if that were to change again from July to something later, do you have any indication of when that decision might be made?
Brian: That’s a great question, it is something that Congress is considering. We’ve seen some verbiage going back and forth on that, you know, I don’t know. It’s a wild card right now to know where that might go but we’d have to know pretty soon because, you know, we’re almost within a month of the deadline, so we’ll hopefully hear pretty soon.
Eric: We’ll know by at least July 14th, right?
Brian: That’d be great.
Eric: So the next question, this comes from someone talking about unemployment, and there are a lot of folks that have, you know, been forced to join the unemployment and then they’re getting unemployment benefits and they’re curious are unemployment benefits taxable?
Brian: Yeah, that’s a great, great listener question. And there is some confusion out there on this, but yes, unemployment…for federal tax purposes, unemployment compensation is taxable and you will receive a 1099 at the end of the year. Now, most folks were given the option or should have been given the option to withhold tax on their benefits, so if they did then certainly there would be some tax withholding to show at the end of the year. But it is something you want to check on and if you didn’t have tax withheld on your benefits, you want to be setting something aside for the end of the year. States vary on their taxability of unemployment so dependent upon the state in which you live, you certainly want to check on that and see if you’re gonna be in a taxable consequence there.
Eric: Got you. All right. So this next set of questions, and there’s a couple in here so I’ll all kind of space them up for you and let you answer and then we’ll move through. So but this question comes in from a listener wanting to know about economic stimulus payments. So first, before we jump into the question, can you briefly describe or discuss the 2020 economic stimulus payments?
Brian: Right. So economic stimulus payments, most folks should have received them by now, there are still some trickling out at this point but most folks received the $1,200 stimulus payment dependent upon their income. There were some income limitations and certain high-income folks did not receive the payments but most other folks did receive the $1,200 economic stimulus payment per person, $500 per dependent.
Eric: Got you. Okay. So the first question is…they reiterated what you just said, they’ve heard that the $1,200, you know, everyone was getting that, but that may reduce your 2020 tax refund and they may have to pay taxes on it, is that true?
Brian: No, our understanding is that is not true. We’ve heard that myths out there but the rebate, what I’ll call it as a rebate, is an advanced payment of a special 2020 tax credit that will show up on the 1040 return for 2020. You’ll reconcile your rebate on your 2020 return. If you got a reduced rebate, you may qualify for some additional rebate, but no, it’s not a direct reduction to your refund.
Eric: Got you. Also, is it true that if I have a dependent on my tax return over the age of 17 that they did not qualify for a stimulus payment?
Brian: Yeah, that is true, Eric. You know, full-time student…the $500 rebate for dependents went up through age 17, but for full-time students which are still eligible to be claimed on a parent’s return between age 18 and 23, they actually did not qualify, they were not included in the law to receive the economic stimulus rebate.
Eric: Okay. All right. And then an interesting one here, so we’ve heard that also deceased individuals are receiving stimulus checks. So let’s say a person, you know, has recently lost someone and they receive a stimulus check for that deceased person, what do they do? How do they deal with that?
Brian: That’s a great question, it’s a question we’ve gotten a lot of this year because there have been a lot of checks that have come out to deceased individuals. So what the IRS has done is when you receive that check, it’s typically coming in the form of a check, and on the front of the envelope, there is a checkbox where you can simply check the box that states that the individual is deceased and drop it back in the mailbox and it will be returned to the IRS. You know, I’ve also heard of folks that have received those checks and cashed them and that’s certainly not something you want to do because, you know, I think treasury will come looking for that at some point. So if you receive that check for a deceased individual, follow the procedure to send it back or, you know, simply reach out to your CPA or your financial advisor and say, “What do I do?” It’s certainly not a check you want to keep.
Eric: Got you. All right. So our next question kind of gets back into the CARES Act a little bit. So the question is the CARES Act provided some benefits for above the line charitable deductions, so what does that mean for those who are taking advantage of that and how can they benefit from it?
Brian: Right, that’s a great question. And when our country goes through a crisis like we just did or still are, you know, lots of folks want to give, they want to help in the cause. And the tax law a few years ago changed where we were no longer seeing as many folks be able to itemize their deductions. With the increase in the standard deduction, many less folks were able to get credit for their charitable donations. So Congress came back, they did add an above the line deduction through the CARES Act for up to $300 of charitable contributions will be deductible above the line regardless of whether you itemize your deductions.
Eric: Nice. So if a listener wanted to donate maybe their required minimum distribution to a charity as they’d done in the past, are they still able to do that based on the changes this year?
Brian: Yes, they can still do that and that’s what’s called a qualified charitable distribution, a QCD. And that’s still a great option for folks that, you know, if they decide I’m going to go ahead, I’m going to take my RMD for this year, you know, regardless of these changes that Congress has made, but I want to go ahead and give it directly to charity, I’m not able to itemize on my return, you can still do the QCD and get the benefit. That’s a great option for folks that no longer can itemize their deductions but still, you know, want to get credit for their charitable donations. You want to work directly with your financial advisor on this, it’s very important that you must designate with, you know, your IRA, whoever holds your IRA, your financial advisor has to designate the charity that you want your RMD to go to and it needs to go directly, very specific rules in regards to these QCDs, but they can be a great idea from a tax planning standpoint.
Eric: Excellent. All right, Brian, last question. Some of those listening are considering student lending right now and kind of how that’s affected. Did the CARES Act provide any relief for student loans or parents that are dealing with loans for their children during the coronavirus pandemic?
Brian: Yeah, it sure did. That’s a great question. And first, I want to step back to charitable donations one more time. One other thing that did happen within the CARES Act that is important is there was a 60% AGI limit on the amount that could be contributed to charity. For folks that are really charitable and wanted to give a significant amount of their income to charity, the 60% limit would in effect limit the amount that they were able to deduct and carry a certain piece forward to a future year. That 60% AGI limit has been suspended for 2020, so I just wanted to clarify that as well. But on to student loans, yeah, payments on federal student loans, again, these are federal student loans, are automatically suspended from March 13th through September. Folks can keep making their payments if they’re able to but it should be noted that the loan, it’s paused, it’s not forgiven. And the six months of the suspended payments will still be due, it’s just been put on pause for the next six months.
Eric: So interest isn’t being accrued and that sort of thing?
Eric: That’s correct, it’s basically just been put on pause but if folks want to want to continue on, you know, current schedule that they’ve been on, if they’re able to make their payments and they want, you know, their loan to end sooner, they are advised to continue to just go ahead and make the payments. One other additional piece of the student loan rules that came up that was pretty interesting was people who have a student loan repayment benefit from their employer, the CARES Act allows up to $5,250 of employer contribution to a student’s debt to be excluded from their income for the 2020 year. So in other words, the first $5,250 that an employer contributes to an individual student debt repayment is tax-free to the individual. So that can be a pretty key item as well that I think we’ll see a little bit of this year.
Eric: Oh, that’s cool. So that suspension of student loan payments and interest, that pause through September, that’s just for federal student loans, right? Like any individual student loans, are they impacted too?
Brian: This is for federal student loans. Some of the individual loans have similar programs, but I would encourage anybody to reach out directly to their loan provider to confirm what programs are available.
Eric: Excellent. All right. Well, that was a very full conversation, Brian.
Brian: Yes, it was. We got a lot out today, didn’t we?
Eric: We did. We did. So I want to sincerely thank you for joining me today and providing the insights that you did. If any of our listeners have additional questions or they want to learn more, or they’re not sure about, you know, their IRA or their required minimum distribution or student loans, whatever it might be, if they have questions and they want to reach out to someone, what’s the best way that they can get the support they need?
Brian: Sure. Yeah, the best way to…I’m glad to answer any questions on anything we discussed today. My email address is email@example.com, so firstname.lastname@example.org. I’m glad to answer any questions on anything we discussed today.
Eric: Excellent. And we’ll put your email address and website address in the show notes. So, and of course, that brings us the end of our show. You can always find more episodes by visiting mybank.com/podcast or find us on your favorite podcast app. You can always leave us feedback, ask questions, or request a topic for us to discuss by sending an email to email@example.com. We thank you for listening. We’ll be back next week with more helpful content. But until then, we wish you the best and focusing on what matters most to you.
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