- Deadline for Contributions to Retirement Plans Extended to July 15, 2020
Because the due date for filing federal income tax returns has been postponed to July 15, 2020, the deadline for making contributions to an IRA for 2019 is also extended to July 15, 2020.
- Waiver of Required Minimum Distributions
The CARES Act temporarily waives required minimum distributions (RMDs) from qualified retirement plans and IRAs for the calendar year 2020. Since most retirement plans have decreased substantially in value since December 31, 2019 (when RMDs for calendar year 2020 are calculated), taking a distribution in 2020 would mean paying more income tax and selling assets at lower values. With this new legislation, account owners now have added flexibility and can retain tax-deferred savings until at least 2021.
For individuals that have already taken their RMD for 2020, the CARES Act unfortunately does not allow for repayment of the RMD back to their retirement plan. However, there is a 60-day grace period which allows for RMDs to be “rolled over” into a new IRA. This provision allows the retirement account owner to avoid paying income tax on the RMD and take advantage of the relief afforded under the CARES Act. Individuals considering RMD waiver for 2020 should contact their plan custodians to determine if any action is required to waive their RMDs for 2020.
- Waiver of Early Withdrawal Penalty
The CARES Act also waives the 10 percent early withdrawal penalty on distributions taken before a plan participant attains age 59 ½. Under then CARES Act, a participant affected by the coronavirus pandemic (i.e., an individual who is diagnosed with COVID-19, whose spouse or dependent is so diagnosed, or who experiences financial hardship because of quarantine or other factors) can withdraw up to $100,000 in 2020 from a retirement plan without incurring the 10 percent penalty. Withdrawals are still subject to income tax; however, you can elect to ratably spread the income over a three-year period beginning with taxable year 2020. Furthermore, if you end up not needing the distribution, you can repay some or all of the distribution back to your plan within the three years of receipt.
- Consider Roth Conversions
The current pandemic has caused U.S. markets to lose considerable value (as of this writing, the Dow Jones Industrial Average is down over 27 percent on the year). Most retirement accounts have suffered as a result. Down markets can, however, present an opportune time to convert a traditional retirement account into a Roth account. The account owner will be required to pay income tax on any amount converted from a traditional retirement account to a Roth account. Since income tax rates are currently low and are set to increase after December 31, 2025 (when the reduced income tax rates created under the Tax Cuts and Jobs Act are set to expire), incurring the income tax now could result in substantial tax savings. Furthermore, as markets recover, the Roth account holder will enjoy tax-free growth and will not pay income tax on future distributions from the Roth account.
- Unlimited Deduction on Cash Contributions to Charity
The CARES Act suspends the 60 percent adjusted gross income (AGI) limitation for cash contributions to qualified charities. Such contributions are now fully deductible in 2020 (i.e., taxpayers can claim a charitable deduction equal to 100 percent of AGI). Taxpayers who do not itemize their deductions are entitled to an above-the-line deduction of up to $300 for qualified charitable contributions.
Jennifer Jordan McCall is chair of the Pillsbury’s Estates, Trusts & Tax Planning practice and co-leader of the Private Wealth practice. Matthew Perotti is an Associate in the Estates, Trusts & Tax Planning practice.
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