Tips on How the CARES Act Offers Important Tax Incentives and Planning Opportunities

The historic $2.2 trillion CARES Act contains an array of favorable provisions for individual taxpayers, but many of those provisions are only available in 2020. Nevertheless, there are also a number of lesser-known provisions that can be utilized for effective long-term financial planning and tax benefits.

Withdrawing Funds from Your IRA Without Enduring Harsh Tax Penalties

The CARES Act allows eligible individuals to take up to $100,000 of distributions from their Individual Retirement Account (IRA) or employer-sponsored retirement plan (e.g., 401k) during 2020 and receive the following relaxed tax rules:

  • Exempt from the 10 percent early withdrawal penalty that would otherwise apply to individuals who withdraw funds from their IRA who are younger than 59 1/2.
  • Individuals have the option to include all of the income from the distribution in 2020 income, or have it split evenly over three years (2020 thru 2022).
  • You can repay the withdrawal any time during a three-year period rather than the normal 60 day rule. If the distribution is repaid, you can file an amended return to claim a refund of income tax attributable to the amount you repaid.

Treat Retirement Account Withdrawal as the Last-Ditch “Break Glass in Case of Emergency” Option

Making a withdrawal from your retirement plan should be viewed as the last resort if all other options have been completely exhausted. Why? Because withdrawing funds from your retirement account is effectively robbing yourself in the future. The withdrawal also carries significant tax implications (i.e. income tax would be owed on the amount you withdraw from your retirement account).

Taking Out a Loan from a Qualified Retirement Plan

The CARES Act expands the overall loan amount an individual can take on their employer-sponsored retirement plan. In fact, the CARES Act doubles the loan amount from $50,000 to $100,000 up to a 100% of your plan balance. Please be advised that this loan needs to be repaid in five years in order to avoid being subject to income tax.

Required Minimum Distribution Rules Waived Temporarily

A provision in the CARES Act waived required minimum distributions for 2020. However, the waiver only applies to defined contribution plans, which include the following:

  • 401(k);
  • 401(a);
  • 403(a);
  • 403(b);
  • Governmental 457(b);
  • SEP IRA;
  • SIMPLE IRA; and
  • Traditional IRA.

However, it should be noted that the waiver does not apply to defined benefit plans.

If you already took your required minimum distribution in 2020, you may be able to return it if you do so within 60 days of the withdrawal. However, this option is only available if you have not made any other indirect rollovers in the past calendar year. In addition, this option is not available to non-spousal beneficiaries of inherited IRAs who have taken already taken their required minimum distribution in 2020.

Updates to Charitable Contribution Rules

Another lesser-known provision of the CARES Act is the suspension of the 60 percent adjusted gross income limitation on the deductibility of qualified cash contributions to publicly supported charities. This is a provision offering significant tax benefits, particularly in reducing your overall taxable income.

However, it is important to note that qualified contributions do not include contributions to donor advised funds, supporting organizations and private foundations that are subject to the 30 percent limitation.

Speak to an Experienced Estate & Financial Planning Attorney

We know this is a difficult and stressful time for everyone. The InSight Law team is here to help in any we can. If you are considering a withdrawal from your retirement plan, taking a loan from your retirement account, making a contribution to a charity, etc. take the time to schedule a call with a member of our team.