Financial Planning Insights
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This is part of an ongoing series of articles about estate planning and succession planning, written by Joe Maier, JD, CPA, Senior Vice President, Director of Wealth Strategy
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (“CARES” Act). The CARES Act provides approximately $2.2 Trillion of economic relief and stimulus designed to help the United States economy and its citizens endure the shutdowns and hardships caused by the Coronavirus. While the CARES Act has several different provisions and areas of focus, the purpose of this blog is to focus on some key planning opportunities created by this Act.
The CARES Act suspends any Required Minimum Distributions (RMDs) that were scheduled for 2020. For account owners, this includes not only 2020 RMDs, but also 2019 RMDs (due to the account owner turning 70 ½ during that year) that were otherwise required to be taken prior to April 1, 2020. Further, it also includes beneficiaries under inherited IRAs. The planning advantages to this provision are (1) extending tax deferred growth and (2) eliminating the requirement to liquidate assets in a volatile market with depressed stock prices.
For more information view our article on RMDs Under the CARES Act.
While the elimination of RMDs is designed to empower people to protect their long term plans, CRDs are designed to protect the short term economic viability of those impacted by the virus. Impact is broadly defined to include both actual infection and economic impact. For those so impacted, in 2020, they can take a penalty free withdrawal of up to $100,000 from their employer plan or IRA (or a combination of both). These distributions are eligible to be taxed equally over a three year period (2020, 2021 and 2022). Finally, the recipient can, at any time within 3 years of receiving the distribution, pay it back to the plan and file a refund claim for any taxes paid.
In 2020, the maximum amount that may be borrowed from an employer sponsored plan is increased from $50,000 to $100,000 and the percentage of the vested balance is increased from 50% to 100%. Further, any plan loan payments that would be due in 2020 are deferred for up to one year.
For IRA beneficiaries who are required to take full distribution of the IRA balance by the end of the fifth year following the account owner’s death (charities and certain trusts, for example), 2020 will not be counted as one of the five years. So for “non designated beneficiaries” who inherited an IRA from an account owner who died in 2015-2019, the five year rule in essence becomes a six year rule.
Since the 2017 Tax Act dramatically increased the standard deduction, materially fewer taxpayer have received any income tax benefit from their charitable contributions. Starting in 2020, for those taxpayers who utilize the standard deduction, they will have the additional benefit of being able to deduct up to $300 of charitable contributions as well. These contributions need to be cash contributions directly to qualifying charities, not contributions to donor advised funds or foundations.
Under current law, cash contributions to charities can be deducted up to 60% of AGI. In 2020, that 60% cap is repealed. So in 2020, taxpayers can completely wipe out their tax liability through equivalent charitable cash contributions. And, if taxpayers contribute more than their 2020 AGI, they can carryforward the contribution for five years.
In these uncertain times, it is critical to take advantage of all available tools to protect your needs, wants and wishes. The CARES Act provides several planning tools that, if implemented correctly, allow plans to work more effectively. Please contact your adviser for a discussion on incorporating these ideas into your plan. We look forward to sharing regular updates with you as more information is released with respect to these important stimulus measures.
This information is for educational and illustrative purposes only and should not be used or construed as financial advice, an offer to sell, a solicitation, an offer to buy or a recommendation for any security. Opinions expressed herein are as of the date of this report and do not necessarily represent the views of Johnson Financial Group and/or its affiliates. Johnson Financial Group and/or its affiliates may issue reports or have opinions that are inconsistent with this report. Johnson Financial Group and/or its affiliates do not warrant the accuracy or completeness of information contained herein. Such information is subject to change without notice and is not intended to influence your investment decisions. Johnson Financial Group and/or its affiliates do not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared. Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Certain investments, like real estate, equity investments and fixed income securities, carry a certain degree of risk and may not be suitable for all investors. An investor could lose all or a substantial amount of his or her investment. Johnson Financial Group is the parent company of Johnson Bank and Johnson Wealth Inc. NOT FDIC INSURED * NO BANK GUARANTEE * MAY LOSE VALUE