At the end of 2020, Congress developed a series of changes related to retirement accounts. For consumers, it was a mixed bag, and you can read more about that in my previous blog post about the SECURE Act.
In recent months, a wide range of further changes have been put in place, under the heading of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and other areas of legislation.
At this point, it’s unlikely we’ll see more changes to the tax code and retirement account laws in 2020, though a change in Washington this fall could bring yet more tinkering to the tax code in 2021. The estate tax threshold, corporate tax rates and tax rates among the nation’s highest earners may come for a re-think.
For now, let’s take a closer look at the terms of the CARES Act.
One of the major changes is the ability to withdraw funds from retirement plans (up to $100,000), as long as you can prove that your income if you or a spouse were diagnosed with the COVID-19 virus, or suffered a job-related drop in income resulting from the virus. And you can defer any tax bill on such withdrawals for up to three years. Pay the funds back in that time frame, and you won’t owe anything.
Just because you can raid your retirement accounts does not mean that you should. The idea behind such accounts is to build a long-term nest egg upon which you can retire. In mot instances, it makes sense to stay the course with your long-term investment strategy, even if the economy and markets are doing all kinds of strange things.
For older investors that have already begun to take their Required Minimum Distributions (RMDs), the CARES Act says you can suspend such withdrawals for this year. That may be a wise option if you are already in a high tax bracket and such RMDs are taxed at rates of 22% or higher.
For those investors that already took their RMDs early in the year, you can ask to put such funds back into your account. Talk to your financial planner to see if it makes sense to do so.
Another change comes with charitable deductions. You can now donate up to $300 in charities and still take the standard deduction. If your finances allow for it, this is a great time to consider supporting your favorite non-profits.
Lastly, if this is a year of reduced income for you, it may be wise to pursue a Roth IRA conversion for some of your retirement funds in your regular IRA. You’ll be taxed on the amount that is rolled into the Roth IRA, but such funds can grow steadily in value and will never be subject to taxation down the road when you withdraw funds.