Retirement planning under COVID–19

From my 12+ years living and working in Washington, D.C. on and off Capitol Hill, I am keenly aware of how quickly major provisions in legislation get lost in the big picture. Massive bills come with massive impact, and far too often average consumers are unaware of relief applying to them. In my view, there are multiple elements in the recently passed stimulus legislation that are not receiving warranted attention on the retirement planning front.

We all know about the direct payments approved under the CARES Act, which provide $1,200 to individuals making under $75,000 and $2,400 to joint tax filers under $150,000, plus a $500 dollar credit for each child. However, are you aware the bill also included an optional waiver of Required Minimum Distributions (RMD’s) on qualified accounts for 2020 and also specific relief on retirement plan withdrawals?

RMD’s become relevant when an individual reaches the age of 70.5 in a qualified account (examples include Traditional IRA’s or a 401(k)), and require an individual to start distributions for tax purposes. An individual can also start their RMD beginning at age 59.5 for retirement income. When funds come out the backdoor of qualified accounts they are taxed since they went in the front door pre-tax. I know many retirees will not want to adjust their annual RMD’s due to their income providing nature, but if practical to your overall financial picture choosing this waiver provides a unique opportunity for funds to recapitalize over a 7.5 month period. Inherited or Beneficiary IRA’s also qualify for the temporary waiver.

In addition to the temporary RMD waiver, the CARES Act included specific directives for those impacted by COVID–19 in relation to retirement plan distributions. If withdrawn these funds are still treated as ordinary income, but the 10% early distribution penalty is removed up to $100,000 under the following scenarios:

• An individual, spouse, or dependent diagnosed with COVID–19.
• Individuals laid-off, furloughed, or unable work due to child-care circumstances.
• Other circumstances as determined by the Secretary of Treasury through the federal rulemaking process.

For this year, you may also deduct 100% of your charitable cash contributions from the previous 60% threshold when factoring in your adjusted gross income (AGI). We all know countless charities in need of our assistance, and your contributions will also come with an enhanced tax benefit.

From my experiences, the legislative process is never perfect. Technical and practical corrections will need to be made as Congress, the Administration, and the Federal Reserve consider further rounds of fiscal and monetary stimulus measures. Negotiations appear well under way on Phase IV in Congress, and let’s all hope our small businesses and their lenders are provided with adequate clarity in relation to the Paycheck Protection Act through the Small Business Administration.

I would encourage individuals and families with questions on the retirement planning perspective to reach out to their financial advisor in these unforeseen times. Even with continued market volatility our industry is well-equipped to answer your questions or simply absorb your current financial state of mind as you plan for the extended future. While the short-term may appear uncertain, I believe it is important to continue to focus on your long-term investment goals. Although these are unprecedented times, the United States economy has proven throughout history to be resilient and dynamic in its ability to adapt and recover.

Best wishes to you and your family and stay safe out there.

Editor’s note: Ben Lincoln, AAMS, is a financial advisor with Raymond James and is a former chief of staff to a U.S. Congressman. The opinions expressed are those of the author.