Economies around the world are affected drastically due to the coronavirus pandemic. Therefore, the US government has passed an emergency funding bill known as the CARES Act. This is done to support and protect American businesses, hospitals, and even individuals. The Coronavirus Aid Relief and Economic Security Act (CARES) is a future-oriented bill. It consists of around 1,000 pages, which contain details about loans, fundings, and tax provisions. In a short note, we can simply say that the bill is designed to provide economic relief. The CARES act has brought the changes that also effect the retiree employee’s income strategies. It all depends on their usage of IRAs 401(k) or social security benefits.
CARES Act Effect on Finance and Retirement
The five major areas of retirement planning effected by the CARES Act are:
- Required minimum distributions
- 401(k) loans
- Social security benefits
- The new exemptions related to Coronavirus
- Charitable giving
Let us talk about them separately:
Required Minimum Distributions
The biggest retirement-related change the CARES Act has effected is that it has suspended all the minimum distributions from retirement plans in 2020. Moreover, these accounts include 401(k), 403(b)s, inherited retirement accounts, and 457(b)s. The provision is too long and not the right push to 2021. You might not have to take two RMDs for the next year.
401(k) Loans
Many 401(k) allow participants to take a plan loan of up to $50,000 or half of their vested account balance. Loans are then repaid over the five years by payroll deductions. Loans funds are not taxable as ordinary income when they come out of the plans.
Social Security Benefits
The pandemic does not directly impact these benefits. However, section 2302 of the cares act allows the employer to push off their liability of federal security taxes. The coronavirus impact can put more pressure on certain kinds of social security benefits. They are on the pace to run out of money by 2024-2025. They may also not be able to provide about 80% of promised benefits. If employment also decreases in future years, it may bring down the income into the kind of trust funds. However, they may also affect the trust depletion rate. A short period of the slowdown might not lay deep impacts, but the long period might affect it in one way or the other.
New Coronavirus Related Distribution Exceptions
Coronavirus related exceptions are those that came under practice after January 1 and before December 31, 2019. These exceptions are done for the individual or their spouse who has been diagnosed with COVID–19. Up to $100,000 can be withdrawn from their retirement and is exempted from the 10% taxes if the withdrawal is made before the age of 59.5.
Charitable Giving
The CARES Act includes three major changes to charitable giving:
- The first relates to RMD suspensions in the year 2020.
- Secondly, the CARES Act includes a new above the line deductions of $300.
- The third includes the provision that the CARES act allows the gift of 100% adjusted gross income to charitable trustees
