Havoc and opportunities: Financial planning considerations related to COVID-19

The world has changed for virtually everyone in the last two months. The coronavirus pandemic is of course first and foremost a health and medical emergency, exacting a terrible toll on human life. We at Altair hope all our clients and friends are sheltering safely and will emerge none the worse from this crisis. COVID-19 also, of course, is wreaking havoc with the economy and investments, disrupting even the best-laid financial plans.

The news on the planning front is not all bad, however. While the drastic steps taken by federal, state and local governments to combat the virus have meant shutting down much of the U.S. economy, financial relief efforts have been similarly aggressive. They merit a closer look beyond the headlines – changes include revisions to tax laws, help for small businesses, postponed deadlines and increased loan options.

The biggest planning changes come as a result of the Coronavirus Aid, Relief, and Economic Security (CARES) Act – the $2.2 trillion relief effort signed into law on March 27. Besides boosting the health care system’s battle against COVID-19 and sending payments to individuals, its provisions include expanded unemployment insurance, loans to small and large businesses and many other measures.

The following are highlights that we want to call to your attention, along with some of our thoughts. Many are items that advisers and clients alike were not talking about a month ago. We encourage you to review them with a close eye to your own situation and discuss them with your Altair team and any other pertinent advisers before taking action. We are happy to assist you.

As you consider next steps, be mindful that in times of social and economic uncertainty it is prudent to conserve cash. It is especially important now to have at least six to 12 months of living expenses in cash. This will give your portfolio time to recover and preserve your options, providing flexibility if you see a buying opportunity that makes sense. You should also keep cash flow and taxes in mind when executing any decisions.

IRAs and retirement plans

RMDs suspended: Typically, you are required to take your first required minimum distribution by April 1 of the year after you turn 70½ (now 72 for those born after June 30, 1949). Subsequently you take RMDs by the end of each year or pay a penalty of 50% of the RMD amount. The suspension covers RMDs for 2020 and 2019 RMDs that would have been due April 1 for individuals who turned 70½ between January 1 and June 30, 2019. It also applies to inherited IRAs.

Withdraw what you need: For retirees who depend on their retirement withdrawals to cover living expenses, RMD suspension is a moot point – you can still withdraw the amount you need. If you usually use withholding on RMDs to satisfy estimated payment requirements and you choose not to take your RMD in 2020, you may need to make estimated tax payments. Estimated taxes are owed on income that is not subject to withholding. This income includes earnings from self-employment, interest, dividends, rents, and alimony. To avoid an underpayment penalty, aim to pay 110% of last year’s tax liability or 90% of this year’s projected liability.

Don’t want your RMD this year? Discuss it with your Altair engagement team to ensure that any automatic distributions are canceled.

Already taken your 2020 RMD? You can roll it back into your IRA within 60 days of receipt. Be careful – there must not have been an IRA-to-IRA rollover in the 12 months preceding the receipt of your 2020 RMD. (You are limited to one 60-day rollover per 12-month period). This workaround is not available to a beneficiary who has taken an RMD from an inherited IRA.

Penalty waived: The 10% penalty for taking early distributions from qualified retirement plans, including IRAs and 401(k)s, is waived. The waiver applies to distributions up to $100,000 taken between January 1, 2020, and December 31, 2020.

Payment deadline relaxed, withholding suspended: Tax on distributions could be paid over a three-year period (the distribution can be taxed as income spread evenly over tax years 2020, 2021 and 2022). The mandatory 20% income tax withholding for rollover distributions is now suspended.

Loan maximum doubled: The maximum loan you can take from a retirement plan (excluding IRAs, from which loans are not allowed) is increased for loans made between the date of enactment of the CARES Act (March 27) and December 31, 2020. Normally the loan maximum is $50,000, or 50% of the vested account balance. During this period, the maximum loan is doubled to the lower of $100,000 or 100% of the vested account balance. The due date for repayment of the loan is delayed one year.

QCDs still sensible? Those age 70½ or older are still allowed to give up to $100,000 from their IRA to charity as a Qualified Charitable Distribution (QCD), even with passage of the Secure Act of December 2019. Normally this counts toward the RMD. Even with RMDs waived, it may still make sense to do a QCD donation. Charities still need money – perhaps now more than ever. QCDs made in 2020 will not apply toward future RMDs but they will reduce the amount of pre-tax dollars in the IRA, which could reduce future income tax and estate tax liabilities. Alternatively, you might choose to donate from a Donor Advised Fund in 2020 and resume QCDs in 2021.

Extra year for some beneficiaries: IRA beneficiaries subject to the 5-year payout rule will benefit from the RMD waiver. Those who inherited in 2015 or later will now have an additional year – six in all – to empty the accounts without penalty.

More time to contribute: Individuals have three more months to make IRA contributions for the 2019 tax year. The federal government extended the contribution deadline to July 15.

Other items
  • Tax filing deadlines have been extended to July 15 by the IRS and most states. The federal extension includes individual, partnership, trust, estate and corporate return filings and payments. Both first quarter and second quarter federal estimated payments are due on July 15th (previously the IRS had only extended relief to first quarter estimates). Taxpayers should check state guidelines since not all have extended deadlines for first quarter 2020 estimated tax payments. A complete list of state filing tax guidance can be found on the AICPA’s website here: https://www.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/coronavirus-state-filing-relief.pdf
  • Contribution deadlines for health savings accounts (HSAs), Archer medical savings accounts (MSAs), and Coverdell education savings accounts (ESAs) have also been extended to July 15.

The material shown is for informational purposes only and should not be construed as accounting, legal, or tax advice.  Altair Advisers LLC is a registered investment adviser with the Securities and Exchange Commission; registration does not imply a certain level of skill or training.  While efforts are made to ensure information contained herein is accurate, Altair Advisers cannot guarantee the accuracy of all such information presented.