5 Things Retirement Savers Need to Know About the CARES Act
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Hey everyone, really quick before we start the show, I've partnered with one of the most brilliant minds over at Dimensional Funds to host a free webinar on April 30th discussing recent market volatility and how to weather this storm. I want to be really clear, there are no strings attached here. This is purely educational. This is my attempt to just get good information in everyone's hands.

To register for the free webinar, just go to staywealthywebinar.com. That's www.staywealthywebinar.com. Okay, on to the show. Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte. And today I'm sharing five things that retirement savers need to know about the recently passed CARES Act.

This was the largest economic stimulus bill in history. And my team and I combed through all 880 pages to pull out the most important items impacting retirement savers. For all the links and resources mentioned today, including a link to all 880 pages, just in case you need some help falling asleep, head over to youstaywealthy.com forward slash 70. ♪

The CARES Act was passed on March 26th, 2020, and it really provides support for five main things. Individuals and families, small businesses, corporations, healthcare providers, and state governments. But it also ensures that an eventual COVID-19 vaccine and treatment or treatments are

will be covered under all private insurance plans. And as mentioned at the top of the show, this was the largest economic stimulus bill in history. It was almost 900 pages long, but we went through all of it. We even sat through some extra webinars and workshops to make sure that we went through every piece of it. And I want to share five things that I think most retirement savers need to know about this bill.

Number one, as most of you know, 90% of taxpayers have a tax-free stimulus check headed their way. In fact, by the time this publishes, you might already have this in your bank account. Here's just about everything you need to know and understand.

a little known tip that high income filers need to know about these stimulus checks. So eligible participants include anyone who has filed a federal tax return for 2019 or 2018 if you haven't filed your 2019 return yet. So 2018 or 2019 tax filers are eligible.

Those receiving social security benefits are also eligible. However, dependents, non-U.S. residents and estates and trusts are excluded from this benefit.

Some people have asked me how the benefit amount is calculated. In short, your adjusted gross income or your AGI, if it's less than $75,000 in 2019, then you can expect a $1,200 check. Or again, maybe it's already sitting in your account. If you're married filing jointly and your AGI is less than $150,000, then you can expect double that, $1,200 for each spouse. So $2,400 total.

Now, your benefit is reduced by $50 for every $1,000 of income over those AGI limits. So keep it really simple. If you're single and your AGI is over $99,000, then your benefit is phased out to $0.

If you're married filing jointly, you're phased out to $0 if your AGI is over $198,000. So that's the short and sweet of it there. There is an additional benefit available to families with dependent children who will receive $500 per dependent child under age 17.

If you're receiving social security benefits, just know that the IRS will use the data available to them from your annual social security statement to determine your benefit amount. Now, as for that little known tip for high income filers, just in case you didn't know this, here it is. If your 2019 AGI was too high to receive a check today to receive that $1,200, you're

but you expect your 2020 income to fall below those stated thresholds, maybe you lost your job or your business is really suffering, you'll receive a tax credit equal to your calculated benefit when you file your 2020 taxes. So make sure to take note of this and make sure to discuss this with your CPA to make sure this credit gets applied if it's applicable to you.

Number two, we're past the traditional tax deadline of April 15th by the time this publishes. So you should already know that the deadline has been extended to Wednesday, July 15th.

State tax filing deadlines. We have listeners all over the country and all over the world. So state tax filing deadlines vary by state, but most of them have aligned with the new federal deadline. If you make estimated tax payments, the due date for your April 15th quarterly payment is now July 15th, 2020. The estimated tax payments due June 15th and September 15th remain unchanged.

For the first time ever, the prior year, this is a big one, the prior year IRA contribution deadline has also been extended 20%.

to July 15th, 2020. That means that you can still max out that traditional IRA, Roth IRA, non-deductible IRA. You know, maybe you're doing the backdoor Roth IRA contributions. If you haven't done it for 2019, you still have time to do it. So this is the low hanging fruit. You don't want to miss out. If you have the opportunity, make sure those 2019...

IRA accounts are fully funded for you and your spouse. And again, I've said this a lot on this show, but just because you're contributing to a workplace 401k or 403b, that doesn't mean you're excluded. You can still contribute to IRA accounts. You may not get the tax deduction. It may be a non-deductible contribution, but you can still put money in IRA accounts. All right, number three, the 2020 required minimum distributions, also known as RMDs, have been waived.

This waiver applies to any required distributions from traditional IRAs, inherited IRAs, and other qualified retirement accounts.

The RMD waiver also delays required distributions for those that are withdrawing under the five-year equal periodic payment rule. Now, if you don't know what the five-year equal periodic payment rule is, you're probably not using it. If you are, then just know that the RMD waiver applies here. A common question that I'm getting right now, what if I already took my RMD for 2020?

If your 2020 RMD was taken within the last 60 days, then you may be eligible for a 60 day rollover treatment if you refund the full amount withdrawn.

If you already took some or all of your 2020 RMD and you'd like to avoid that taxable income, then you might consider taking advantage of this and rolling the funds back into your IRA. Work with your custodian, work with your financial planner. Just remember, RMDs are taxed as ordinary income. So if you don't need the money and you have other resources to survive right now, then consider delaying that income and let that money grow tax deferred for a longer period of time.

This can keep you in a lower tax bracket, but it can also allow for additional Roth conversions in 2020 because you're in a lower tax bracket. One really important thing to know here and the chance it applies to you in rare cases is

The RMD waiver may also apply to taxpayers who were required to take their very first RMD in 2019. So if you turn 70 and a half in 2019, and that was the very first year that you had to take it, this rare case may apply to you. Technically, you had until April 1st of this year, 2020, to take it.

if you procrastinated and you didn't take that 2019 RMD and this rare case applies, you would get to avoid not only your 2020 RMDs, but you'll also get to avoid your 2019 RMDs. So you're actually being rewarded for procrastinating. Again, this is a rare situation. You'll know if this applies to you. If last year was your very first year to take the RMD, you waited too long. It actually benefited you. All

All right. Number four, penalty free withdrawals from IRAs and 401ks. First things first, I obviously do not condone taking early withdrawals from your IRA or 401k. We work really, really hard to get money into these tax advantage investment accounts, and we need our money to grow inside there for long periods of time so that we can reap the benefits of compounding growth.

That being said, we are going through really challenging times right now, and it may be your only option. Fortunately, the CARES Act is allowing you to take penalty-free withdrawals this year in 2020 up to $100,000. Remember, the standard early withdrawal penalty of 10% only applies to those under the age of 59 and a half. So if you're over that age, then this doesn't really apply to you. But for those that are under 59 and a half,

You might be able to argue that just about everyone is eligible for this benefit, but here are the specific circumstances outlined in the bill. You would need to be able to prove one of the following. You or your spouse or dependent in your household was diagnosed with COVID-19.

Number two, you suffered adverse financial consequences as a result of quarantine, furlough, reduced hours, or layoffs. So that's where I mean, like you could probably argue that just about everybody is eligible just based on that bullet point alone. Number three, you're unable to work due to lack of childcare. Again, that's going to impact a lot of people. Kids are home, not in school. And then number four, you own your own business that closed recently.

or had reduced hours of operation during the quarantine. So those are the four main things you would need to be able to prove in order to take advantage of this.

Although you don't have to pay the typical 10% penalty, you still have to pay ordinary income taxes on the withdrawal. Notice I said penalty-free withdrawal, not tax-free. So when you take money out of an IRA, a traditional IRA or traditional 401k, again, under 59 and a half, normally you'd pay a 10% penalty. That's waived, but you're still going to pay ordinary income taxes on that withdrawal.

However, you do have some flexibility as to how to deal with those taxes. And this is really, really helpful. So you really have two options. When you take that early withdrawal, if you roll the money back into your IRA within three years, you can avoid paying the tax. So it's almost like a free loan, right? You're going to take it out penalty free. And if you return it back within three years, you can avoid paying that tax. Also,

As it stands now, it appears you can put the funds back on any schedule that works for you. So you don't have to put it all back at the same time. If you took $50,000 out, you could redeposit $10,000 back later this year, $20,000 next year, and then 20,000 the following. You could break it up in even smaller amounts if you needed to. Again, as it stands now, there has been some lack of clarity around this, but it sounds like you have three years to just get that money back into the IRA.

The second option you have, if you know that you're going to keep the money and that you're not going to roll it back in at any point, just know that you can spread the tax obligation out for up to three future tax years, which gives you some breathing room. Normally, when you take money out of an IRA, a traditional IRA, at least, you pay taxes in the year that you withdrew it. But right now they're giving you three years to pay the tax bill so you can spread it out, give yourself some breathing room.

A common question that we've received is, what do I actually need to do to process this? Like, I want to take advantage of this. I need to get money out of my 401k or traditional IRA. I want to take advantage of this penalty-free withdrawal. So how do I actually do this? It's really simple. Just work with your custodian. So wherever your money's held, Schwab, Fidelity, Vanguard, Morgan Stanley, Merrill Lynch, Wells Fargo, wherever your accounts are held, work with that custodian to process your early withdrawal. Early withdrawals are normal. They happen all the time.

This is not just specific to the CARES Act. So every bank or custodian has standard paperwork to process an early withdrawal.

Your custodian is also or should also handle the tax reporting showing the withdrawal and handling the tax reporting when and if you roll funds back into the account. So at the end of every year, you know, you get those tax documents from your custodian that you give to your CPA and those tax documents should track and report those deposits and withdrawals so that your CPA or accountant can process your tax returns properly each year and then track this based on the new rules.

That being said, it doesn't hurt to have your CPA in the loop through all of this. Like right now, if you take a penalty free withdrawal right now, I would loop your CPA. And if you work with a financial advisor, loop them and make sure everybody's looped in right now so they can help you track and navigate all this. Especially if you're going to be rolling dollars back in at different times and in different amounts, make sure that the whole team is on the same page here so nothing gets missed.

If you have a financial advisor, by the way, they would just be the perfect starting point. Just go to them, tell them you need or want to do this, and they'll be the starting point to help you process everything. Again, please be sure this is used as a last resort. And more importantly, I want to make sure that before you just go withdrawing funds from your IRA accounts, that you have a written financial plan that's guiding these decisions. It doesn't mean you have to go out and hire a full service wealth manager or pay thousands of dollars.

It could just be a one-page financial plan written by you and your spouse before you go and do anything. And I've mentioned it before, but Carl Richards wrote a great book called The One-Page Financial Plan. So if you don't know where to start and you want to put one together for really, really cheap, go buy The One-Page Financial Plan by Carl Richards and put this in writing. Put your plan in writing. Don't just quickly react and go take a withdrawal from your account.

All right, wrapping it up here. Number five, homeowners are protected from foreclosure for 180 days. Now, really quick, I know this may not apply to most of our listeners. You guys are rockstar savers, and I know you have a really good handle on your finances, but

I want to highlight this in case there are loved ones in your life who are impacted or, and I know a lot of our listeners fall into this camp, or if you are a rental property owner. So the first thing to know is the foreclosure protection under the CARES Act only applies to mortgages owned by the federal government. That'd be Fannie Mae or Freddie Mac.

Most of us don't know what happens to our mortgage after we sign on that dotted line. We're just so happy to have the mortgage and have our new house. We don't really know what happens afterwards. So we don't know if our mortgages are through the federal government. Thankfully, you can look up for yourself to see if your mortgage is owned either by Fannie Mae or Freddie Mac. I'll add these links to the show notes again, which you can find at youstaywealthy.com forward slash 70.

If you confirm that your loan is owned by either Fannie or Freddie and you're experiencing a hardship, then you can apply for up to 180 days of loan forbearance. Now, forbearance means the loan payments may be postponed, right?

but interest will still accumulate at a rate equal to the scheduled amount for those delayed payments. Just to highlight, forbearance is different than deferment, where deferment is a halt on principal payments and interest accumulation, but interest will still accumulate at that rate right now.

While the initial forbearance period is 180 days, I also want you to know that an additional 180 days may be requested. Now, it's not guaranteed to be approved and get this, it's up to the discretion of the U.S. government. So, you know, nothing guaranteed here, but the initial forbearance period is 180 days. Just know that you can request an additional 180 days, but it may not be approved.

If you're a rental property owner, you can request mortgage loan forbearance, but it comes with some strings attached. The most significant is that landlords can't evict tenants while their properties are in this forbearance period. And in no case may they evict their tenants before 30 days written notice to vacate. So just make sure you have all the facts and details, especially if you're a landlord, if you're a rental property owner, before you go rushing into applying for this benefit.

All right, we made it to the end. I tried to keep it short and sweet. There's a lot of information out there. The CARES Act comes during a time where all of us just find ourselves in truly uncharted territory. Things are changing every single day. And although each of our circumstances are different, one commonality between all of us is that with a little planning, guidance, and community, which we have here,

I promise we will emerge from this with a greater appreciation of what each of us finds most important in life. Once again, really quick before I let you go, I'd love for you to join me for our free webinar on April 30th. To register again, all you have to do, go to staywealthywebinar.com, www.staywealthywebinar.com. Stay safe, stay healthy, try to enjoy this time as much as possible, and I will see you back here in two weeks.

This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services. ♪