Podcast: Episode 2

Listen to find out how to put the CARES act to work for your retirement planning

Podcast: The CARES Act: What's in it for you?

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TIAA Perspectives Podcast Episode 2: The CARES Act: What's in it for you? Hosted by Jim Daniello, CFP®, wealth management director for TIAA. Joined by Colleen Carcone, wealth planning strategies director for TIAA. - [Jim] Hi, everyone. I'm Jim Daniello, a wealth management director for TIAA. Thanks for joining me for another installment of TIAA's Perspectives Podcast, where we'll talk about financial planning strategies, money management tips, and steps you can take now to remain on track towards your goals. Today we're gonna break down the recently enacted CARES Act for you. Joining me today is my colleague and good friend Colleen Carcone, a TIAA Wealth Planning Strategies Director. Welcome, Colleen. - [Colleen] Hi, Jim. - [Jim] We'll be talking about some of the key provisions in the CARES Act and why they're important to those of you in or nearing retirement. Now, Colleen, let's start with what the CARES Act is for those who may not be familiar with it. - [Colleen] Sure Jim, on March 27th 2020, the Coronavirus Aid Relief and Economic Security Act or CARES Act was signed into law. The CARES Act includes a number of provisions that were designed to help individuals and families manage through these financial consequences of the Coronavirus pandemic. For market volatility, employment, cash flow disruptions, families need some assistance. For example, it provides direct cash payments to individuals and families, waives required minimum distributions from retirement plans for 2020, allows for penalty free Coronavirus related distributions from retirement plans and increases the amount you can borrow from your retirement plan, if you have been impacted by the Coronavirus and if your plan rules allow. The bill itself is 830 pages, but for today's presentation, we're only going to focus on those provisions impacting clients with respect to their retirement plans in distributions. - [Jim] So Colleen, let's Back to the first provision you mentioned direct payments. That's something we've heard a lot about in the news. In fact, many people have already received their payments through direct deposit. For those who haven't yet, can you tell us who's eligible and how much they should expect to receive? - [Colleen] Sure, Jim, the payments you're referring to are the Economic Impact Payments, and you're right, they started going out on April 16. So many have already received their payment. - [Jim] So a question on a lot of our listeners minds, will everyone receive one of these checks? - [Colleen] Jim, not everyone will receive a payment or the full amount and here's how that works. If you are single, the payment is $1,200. If you're married, the payment is $2,400 and there's an additional $500 per child under age 17. Now the payment is going to be based on your adjusted gross income from your most recent tax return. If you've already filed 2019 then that tax return information will be used otherwise it will be based on your 2018 return. Now, I said not everyone was going to receive the payment and that's because the payments do phase out. If you are single and have more than 75,000 of AGI, your payment will start to phase out and it will be completely phased out at 99,000 of AGI. If you're married filing jointly, it starts to phase out at 150,000 of income and is completely phased out above 198,000 of income. And remember, your AGI includes all sources of your income, whether earned if you're working, retirement plan distributions if you're receiving those, income capital gains and even a portion of your Social Security. - [Jim] So, Colleen, let's talk about something that's a huge deal for a lot of our clients right now. The CARES Act waived required minimum distributions for all of 2020. I'm sure you've been on the phone with a lot of clients discussing this in recent weeks, just like I have? - [Colleen] Yes, Jim, for sure. - [Jim] Now, just so people know what we're talking about, anyone subject to taking required minimum distributions from retirement plans and IRAs, including inherited IRAs can waive all RMDs for 2020. - [Colleen] Exactly Jim and this really provides an opportunity for you to take a step back and think about your planning. You're gonna wanna think about whether you have other resources that you can use to meet your income needs or expenses. Do you have other non-retirement investments? Do you have cash reserves or emergency savings? If you don't need to take your RMD in 2020, you can allow your retirement plans time to grow tax deferred and potentially begin to recover from some of the recent market volatility that we've been experiencing. And this is where your advisor can really help, by working with you to put together that comprehensive plan to help you think through how to meet your income needs. - [Jim] That is so true Colleen. I've been using the asset location worksheet with a lot of our clients recently for that very reason, trying to help people who are subject to RMDs, determine if they can afford to waive their required minimum distribution this year, and take money from other sources. I've actually found that this worksheet is so helpful. It organizes your assets based on their purpose, and when you intend to use them. Your worksheet will show you if your emergency savings or other resources, provide enough income so that you can avoid taking a distribution from your retirement plan. That can be a huge help in keeping your short and long term goals perfectly on track. - [Colleen] That's a great point Jim, and we should also mention that if you still want to take a distribution this year you can. The waiver doesn't prevent you from taking an RMD, if you do need that money. - [Jim] Now Colleen, what if I took an RMD but changed my mind can I roll it back? - [Colleen] Yes, Jim, under certain circumstances you can. And here's how that works. If you have already withdrawn either all or a portion of your 2020 RMD, you might have the option to roll that money back into the plan or into the IRA. There is a rule called the 60-day rollover rule that allows eligible rollover distributions to be rolled back into the plan within 60 days. Now, the IRS has already extended the deadline for 60 day rollovers of contributions that were made on or after February 1st to July 15th. And we are waiting for further guidance to see if that extension will be granted to January distributions as well. This is of course subject to your plan rules. And if you're rolling back into an IRA, you are limited to rolling only one payment received from an IRA within a 12 month period. And Jim just one more note here, distributions to non-spouse beneficiaries of inherited retirement accounts such as inherited IRAs are not eligible for 60-day rollover. Spousal beneficiaries may repay distributions via spousal rollover however. - [Jim] It sounds like this can really get complicated quickly. So you're gonna wanna consult your accountant, tax advisor or wealth advisor before making any of these changes because the rules are complex. And now is not the time to make a costly mistake. - [Colleen] You're right Jim, it's very, very important that you consult your accountant. You do not want to inadvertently break any of these rules. - [Jim] Well, I'll be sure to consult my accountant. What about distribution for those nearing retirement, Colleen, who's eligible to receive a Coronavirus related retirement plan distribution? - [Colleen] If you are under age 59 and a half and if you meet certain criteria, you can take a penalty free distribution in 2020 from a qualified retirement account or IRA of up to $100,000. Now, if you take one of these distributions, you will still have to pay ordinary income tax on the distribution. But the 10% early withdrawal penalty will be waived. And here's the deal, that tax liability can be spread over three years. Now, in order to qualify you, your spouse or a dependent has to have met certain criteria with respect to COVID-19 diagnosis and testing or has to have suffered financial hardship as a result of COVID-19. And also note that this is subject to plan rules, and not all plans will adopt these higher limits. Plan sponsors may choose to opt out and not offer distributions or loans that are outlined in the CARES Act. - [Jim] Well, it's great to know that this is an option for those who might need it. Now what if you pay the money back Colleen? What happens then? - [Colleen] If you choose to pay it back in year one, you won't owe any taxes. However, if you only recontribute part of it in 2020, or if you pay it back in a later year, you will have a tax bill. That's why it's so important to work with your tax and your wealth advisors before making any important financial decisions about retirement plan distributions at any age. - [Jim] So Colleen, let's talk about loans from qualified retirement plans, what's changed under the CARES Act? - [Colleen] For individuals who qualify for Coronavirus related distributions, the maximum loan amount from a qualified plan increased from 50,000 or 50% of your vested account balance to 100,000 or 100% of your vested account balance, whichever is smaller. These loans must be made within 180 days of the enactment of CARES Act, which is September 23rd 2020. And keep in mind the loan provisions does not apply to IRAs. It's for employer retirement plans, like your 403 or your 401 . - [Jim] You know, Colleen, a lot of our advisors have had several weeks now to study the provisions under the CARES Act and to talk to clients about opportunities available to them under the new legislation. There are a couple of areas that are particularly meaningful to our clients. One of them is charitable giving. What are some of the planning opportunities that you're seeing here? - [Colleen] There are several opportunities for those who are charitably inclined. Let's start with those who do not currently itemize on their income tax return. The CARES Act allows an individual to take a $300 above the line deduction for cash contributions to charities. For a couple that's $600 that you can deduct. Now, these are cash donations made directly to an organization only. So this will not apply to donations made through a donor advised fund or supporting organization or if you make gifts of securities or other assets. Another big change is that if you do itemize the amount you can contribute and deduct from taxes is normally limited to 60% of your AGI. In 2020, that limitation or cap has been suspended. That provides a tremendous opportunity for people who may not have been able to itemize otherwise to do so, and it allows anyone who wants to make significant contributions in 2020, potentially offsetting 100% of your income if that's what you desire. - [Jim] So calling a strategy that a lot of our clients aged 70 and a half and older have frequently used to make charitable donations is a qualified charitable distribution, or what we call IRA to charity. This is a great way for those subject RMDs to reduce or eliminate taxes on their required minimum distributions. However, since RMDs, have been waived for 2020 is this really something people can or should still consider? - [Colleen] You know, Jim, this is another area where your advisor can really help. Since the RMD requirement was waived for this year, you're still allowed to do an IRA to charity. But it's not going to give you the same immediate income tax benefit. So if you have other resources to meet your living expenses and your charitable goals, then it might make more sense to use a different strategy in 2020, such as direct cash contributions in order to help lower or eliminate your tax bill. - [Jim] Now, Colleen, I've spoken to a number of clients in recent weeks about Roth IRA conversions. Can you tell our listeners why the current environment may be conducive for a Roth conversion? - [Colleen] Jim, this is something I've been talking to clients about all year. And here's why. Let's start by explaining what a Roth conversion is. When you take money out of your retirement plan or your traditional IRA, and you convert it to a Roth, the amount you convert is going to be taxed as ordinary income at the time of conversion. Roth conversions may be an appropriate strategy for those who will have lower income this year than in future years due to a reduction in earned income or the elimination of 2020 RMDs. So converting those assets could be beneficial from a tax perspective if overall income is down in 2020. Another reason so many people are looking at Roth conversions now is due to the SECURE Act, which was passed in December of 2019. The SECURE Act changed the rules for how our beneficiaries have to take distributions from retirement plans. Most non-spouse beneficiaries must take distributions within a 10 year period, which can create a tax burden for our beneficiaries. Converting to a Roth would enable our beneficiaries to receive tax free distributions since the taxes were already paid on the assets upon conversion. And if we are in a lower income tax bracket than our beneficiaries would be, then this might save tax dollars. - [Jim] Colleen some of our clients have expressed concern, though about locking in losses if they convert assets now. But one thing to keep in mind is that with the markets down from their highs that we experienced in 2019 and early 2020, converting now may result in lower taxes paid on the assets converted. Don't you agree? - [Colleen] That's a good point, Jim and in addition, if you convert now, conceivably, if and when the markets come back, all of that growth will occur in the Roth, so it will be tax free. So it's really about weighing the different options available to you and determining which strategies make the most sense for you and for your goals. I think we've touched on some important ways the CARES Act can help you manage your income needs and tax exposure, while continuing to realize your charitable goals. Colleen, if you had to pick what's the most important thing people can do right now to take advantage of opportunities available under the CARES Act? - [Colleen] The most important thing that people can do right now is scheduled time to talk with your advisor. While we can't meet in person at this time, know that your advisor is working and is available to meet by phone or by video conference or email you to assist you. - [Jim] That's a great point Colleen. We are open for business and fully operational to serve our clients. And I wanna say thank you to all of those listening and spending a few minutes of your time with us today. We hope we were able to address some of your questions and concerns. Again, we encourage you to reach out to your TIAA Advisor to schedule time to talk about ways you can keep moving forward towards your goals. Have a great day, everyone. Jim Daniello is a Registered Representative of TIAA-CREF Individual & Institutional Services, LLC. This material is for informational or educational purposes only and does not constitute investment advice under any securities laws. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Please consult your Financial or Tax professional before taking any action. 2020 and prior years. Teachers Insurance and Annuity Association of America College Retirement Equities Fund. New York, NY 10017 1144210

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