From the Pinnacle CPA Advisory Group Newsletter/Thomson-Reuters —
If you’re affected by COVID-19 and find yourself in need of additional cash flow, the CARES Act contains several taxpayer-friendly provisions for retirement plan distributions taken prior to the end of 2020.
For taxpayers under age 59 1/2, COVID-19-related withdrawals up to $100,000 from a qualified retirement account [IRA, 401(k), 403(b), etc.] aren’t subject to the normal 10% early withdrawal income tax penalty. While all 2020 withdrawals are still subject to income tax, you have a couple of options to limit the tax burden. First, you may elect to spread the income tax payments over three years rather than pay all of the tax in 2020.
You also may recontribute the amount withdrawn to another qualified account within the next three years rather than the standard 60-day rollover timeframe. (No income tax is due if you recontribute within the three-year window.) Even if you don’t need the cash, this is an opportunity to move funds out of an employer-sponsored plan and into an IRA that you can control.
To qualify for these special rules, you (or your spouse or dependent) must have been diagnosed with COVID-19 or been affected financially as the result of a layoff, reduction in hours, or another inability to work due to COVID-19. If you think you may be eligible for these income tax breaks, please contact us to review your situation.
Income tax rates beneficial now
If you have funds in a traditional IRA and have been considering converting the account to a Roth IRA, 2020 might be a great year to execute that plan. Current income tax rates are relatively low. Given the current economic situation and the possibility of leadership changes following the November elections, it’s unlikely tax rates will decrease anytime soon.
It’s also possible that your income from other sources is down, driving you into a lower tax bracket. Since the CARES Act suspended Required Minimum Distributions (RMDs) for 2020, if you already budgeted to pay tax on your RMD, rolling that distribution to a Roth IRA could be a perfect move. No RMD for 2020 also means that 100% of the distribution can be classified as a rollover.
No one likes to see the value of their retirement account plummet like many of us saw earlier this year, but perhaps there’s a silver lining to that decrease in your traditional IRA’s value.
A depressed value in your IRA means a rollover distribution in a market downturn will contain more assets. Once in the Roth IRA, the recovery of value and ultimate withdrawal will be tax free.
Of course, there are possible disadvantages. For instance, increasing your 2020 income could mean more of your Social Security payments will be subject to income tax or result in increased Medicare premiums. Also, unlike a few years ago, the ability to “undo” this conversion no longer exists. Once you convert, it’s permanent. All factors should be considered along with your overall retirement plan. Please contact us with any questions.
Last, but not least, the SECURE Act removed the age limitation for deductible contributions to a traditional IRA. So, if you’re over the age of 70 1/2 and have earned income, you may want to consider making a deductible IRA contribution in 2020.
If you have questions about 2020 withdrawals from your retirement accounts, or about taking advantage of the myriad Coronavirus Relief programs in place, contact the professionals at the CPA Advisory Group. We can help. Just fill out the form on our Contact page and we will promptly get back to you.
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