As you may know, the $2 trillion coronavirus economic recovery bill — officially known as the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) — was recently signed into law.
The CARES Act is overwhelming with some 880 pages, but it contains much needed relief for individuals and business owners. I want to make you aware of important information within the CARES Act that may be helpful to you with respect to your retirement plans, tax benefits, cash flow, and more.
In this update and the next few, we will highlight different parts of the CARES Act that you (or someone you know) may find of interest. Please do not hesitate to contact us if you have any questions or would like to discuss further.
CARES Act Waives Required Minimum Distributions From Retirement Accounts for 2020
Under the new CARES Act, those who are subject to mandatory minimum distributions (RMD) from their qualified retirement accounts — such as a 401(k), 403(b) plan, or from an IRA — qualify for the waiver in 2020, including beneficiaries, and including those who turned age 70 1/2 in 2019 and had to take their first RMD by April 1, 2020. Besides the relief these RMD waiver provisions provide, it also opens up some planning opportunities. One example of such a planning opportunity is explained below, as per AARP:
Normally, RMDs cannot be converted to Roth IRAs, but now since there are no RMDs, you can withdraw IRA funds at low values and low tax rates and convert them to your Roth IRA.
Yes, you pay taxes on the conversion, just like you would have on your RMD. But your RMD could not be converted to a Roth, so even though you paid the tax, you could not get the conversion benefit.
Now, under this 2020 RMD waiver period, you can get more for the tax you pay by being able to convert the funds you withdraw to your Roth IRA at a relatively low tax cost.
There are several additional benefits to this:
- First, any amount converted removes those funds from your IRA, lowering the balance that will be subject to future RMDs, and in turn lowers your income and tax bill for future years. Lowering your income in the future could also lower the tax on your Social Security benefits and lower your Medicare IRMAA (income related monthly adjustment amount) surcharges.
- In addition, once the funds are in your Roth IRA, there are no more lifetime RMDs, and anything you withdraw will likely be tax free. The Roth funds will also pass income tax-free to your beneficiaries.
- Converting now when market values have dropped will mean that any future rebound will now accumulate tax free to you in your Roth IRA. If the market rebounded while the funds remained in your traditional IRA, then those gains would be eventually taxed.
The key factor in deciding whether to convert or not is the tax rate you are at now compared to what future tax rates might be. If you expect your future tax rate in retirement to be the same or higher, it pays tax-wise to convert.
Read more about this online at AARP.org (read full article here).