Although the value of investment accounts have declined during the COVID-19 pandemic, retirement investors may have a tax-related silver lining with respect to legislative changes to account distribution requirements, loan provisions and IRA conversion opportunities.
CARES Act: Plan Distributions and Plan Loans
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020, contains permissive provisions affecting qualifying retirement plan distributions and loans.
First, the CARES Act provides for a “coronavirus-related distribution” to qualified individuals, which include those meeting the following criteria:
The qualified individual will have the opportunity to withdraw up to $100,000 as a “coronavirus-related distribution” from certain retirement accounts in 2020, without paying the 10% penalty tax the law generally requires for early withdrawals. Although the early distribution will be taxable income, the assessment of income taxes can be spread out over three years. All or some of the distribution may also be repaid into an eligible retirement account over the three year period.
Second, the CARES Act temporarily increases the maximum amount the qualified individual can borrow from a retirement account to $100,000 (instead of $50,000) or 100% of the accrued benefits (instead of 50%), whichever is less. Loan repayment for such loans may be delayed for one year, thus allowing a maximum repayment period of six years instead of the five years available outside of the CARES Act provisions.
CARES Act: Temporary Waiver of Required Minimum Distributions
The CARES Act also provides relief relative to required minimum distributions (RMDs), regardless of whether the investor or beneficiary has been directly affected by COVID-19. Generally speaking, a RMD is the amount of money that is required to be withdrawn annually from a retirement plan or IRA when an account holder attains the age of 72. The CARES Act temporarily waives any RMD requirement for 2020 and any 2019 RMDs that were deferred and due April 1, 2020. If the waived RMD has already been taken, the investor may roll it back into a retirement account within 60 days of distribution, without incurring any tax costs or penalties. (Beneficiaries of inherited IRAs, however, do not have the ability to return funds using the 60-day rollover period.) By waiving and/or returning the RMD distribution, assets can remain in the retirement account to allow continued tax-deferred growth.
ROTH IRA Conversions During Market Depression
Finally, the current market depression creates an opportunity to convert a traditional IRA to a Roth IRA at a lower tax cost. In a traditional IRA, contributions are made with pre-tax dollars, and taxes on the investment growth are deferred until distribution. Conversely, Roth IRA contributions are made with after-tax dollars, such that the investments have tax-exempt growth, with no additional tax assessment upon withdrawal, provided certain conditions are met. Whereas traditional IRAs are subject to RMDs once the investor reaches retirement age, Roth IRAs are not.
Regardless of the investor’s net worth, converting a traditional IRA to a Roth IRA allows the investor to leave IRA assets tax-free to loved ones. Roth IRA conversions are taxed as income according to the value of the assets at the time of conversion, so a conversion is ideal when the assets have a lower market value. Moreover, incurring the taxable income now could be especially timely if the investor’s regular income (and thus his or her tax rate) will be lower this year.
About Rebecca Hinton: Taylor Porter Special Counsel Rebecca Hinton represents individuals and businesses in the areas of federal, state and local taxation; tax controversies; estate planning; business matters; successions; and trusts. Rebecca is ranked by her peers among Best Lawyers® in tax law, and is rated Martindale-Hubbell AV-Preeminent. Rebecca is an adjunct professor at LSU Paul M. Hebert Law Center, and frequently presents at CLE and other seminars on the topics of federal estate and gift taxation, estate planning, and federal taxation. Rebecca serves as vice president of the Estate & Business Planning Council of Baton Rouge.
About Leah Canaday Cook: Taylor Porter Associate Leah Canaday Cook practices in various areas of commercial litigation. Leah earned her J.D. in 2017 from LSU Paul M. Hebert Law Center, and was inducted into the Order of the Coif. In addition to receiving her J.D., Leah earned her MBA from LSU in 2017, graduating from the Flores MBA Program. She was a member of both the Master’s of Business Administration Association and the National Association of Women MBAs.
DISCLAIMER: The tax law information provided herein does not, and is not intended to, constitute personalized financial advice. Individuals should consult with their financial advisors to evaluate whether such options make the most sense for their personal financial situation. This article is also for general information purposes only. Information posted is not intended to be legal advice.
This website is for general information purposes only. Information posted is not intended to be legal advice. For more information, please see our Disclaimer message.
8th Floor • 450 Laurel Street • Baton Rouge, LA 70801 • 225-387-3221