The CARES Act Loosens Tax Rules on your Accounts.
I will start with something I reminded you of in a previous post. If you have just been furloughed it is most likely to your advantage to distribute your 401K into an IRA. Furthermore, if by the end of 2020 your yearly income is looking grim it could also be to your advantage to distribute from your IRA into a Roth. Even though this has little to do with the CARES act, it may well be relevant to your current situation.
The ‘‘Coronavirus Aid, Relief, and Economic Security Act’’ or the ‘‘CARES Act’’ became law on 3/27/2020. You can access the full text of this law here. I would like to focus on a few sections that may directly impact your financial accounts.
First, section 2201 (page 55 of the act) specifies the $1200 per person you may receive and its conditions. It is much easier to go here and find out if you are entitled to it. If you are and still haven’t received anything you can go here and the IRS will give you a reason for the delay.
Second, section 2202 (page 60 of the act). You can now make a “corona virus related” distribution of up to $100000 from your 401K or IRA without having to pay the usual 10% penalty. For tax purposes these distributions can be spread over three years and taxes can be avoided if the money is contributed back into the 401K. This is a very substantial easing of what is usually called the 60 day rollover rule (no tax if you distribute and contribute back in within 60 days). You qualify for this flexibility if your income or ability to work has been affected by the virus (details are on page 61 of the act).
Third, if you already have an outstanding loan from your 401K, you can suspend your loan payments by as much as one year (page 62 of the act). If you do not already have a loan and your 401K provider offers that possibility, you can borrow from your 401K but the maximum loan allowed is now $100K or half of the amount in your 401K, whichever is lowest. That 100K is double of the previous $50K limit.
Fourth, section 2203 (page 63), if you are over 70.5 year old and were required to do a required minimum distribution from your 401K or IRA, that distribution is now waived for 2020.
Finally, if all this misery around you inspires you to give to charity (any charity, not just Covid 19 related) you can now deduct up to 100% of your Adjusted Gross Income of cash donations done directly to charities (page 65). That 100% is an increase from the previous 60%.
Thanks to the CARES Act, your 401K, and your IRA are now easier to tap to face your current situation. Tapping these accounts is now possible without incurring income tax of any sort (provided that you return the money later). You can also use your tax exposed accounts to get very inexpensive lines of credit in the form of a margin loan. This allows you to face a temporary cash need without selling securities and incurring capital gains. Anselme Capital has a relationship with an institutional broker that provides the lowest margin rates of all (1.5% as I write this). Please use the flexibilities afforded to you by the Cares Act with your 401K or IRA accounts, please use the flexibility of margin loans to make sure you go through the storm without being skinned alive by taxes.
We at Anselme Capital are not licensed accountants, consult with yours.
Be safe,
Marc
