Should you act on the CARES Act?

The CARES Act introduced some changes to loans, withdrawals, and Required Minimum Distributions (RMDs) which leaves a lot to be sorted through. There are 3 main topics that pertain to retirement accounts. Are there any changes that should impact your planning or offer an advantage? We will take a closer look.

The waiver of Required Minimum Distributions (RMDs) for 2020 is the first.

There are no RMDs for IRAs, 401ks, or Inherited IRAs for 2020. Although I hear a lot of celebration for not having to take money out and recognize the income, should you take a (non required) “withdrawal” anyway? Well, if you are relying on the RMD for income, then this is a moot point. But if the RMD is optional, or if you have assets elsewhere to supply that needed income, there could be room to roll up your sleeves. Of course, this information should be verified with a tax advisor, as we are not one.

This may sound familiar if we have talked in the past, but it largely comes down to a tax bracket question. How do you expect your 2020 tax situation to compare with future tax years? Is your income down in 2020 below the normal threshold? Would it be wise to take money out of retirement accounts anyway? I can imagine some tax preparers clutching their pearls when I say that, but hear me out. If your income, as an example, were to drop from a “normal” 22% Federal bracket down to a 12% bracket this year, there’s a 10% “buffer” there from normal. Which, is a pretty significant dollar amount, possible $1,000 less in taxes per $10,000 withdrawn. More work needs to be done with the help of a tax preparer to find the sweet spot, but this does open the door to withdraw money at a lower tax bracket than normal. At least it is optional this year!

Next up is the waiver of the 10% penalty on pre-59.5 distributions.

This one gets a little more tricky because it appears to me that there is a requirement for “hardship” proof from the Coronavirus. Additionally, not all qualified plans allow withdrawals while you are working and may need to be amended to even allow it. Some of these providers are offering these changes for free for a short period of time, but it’s up to the employer to make those changes. (And some may not make those adjustments for the reasons I’ll mention below.)

Qualifications for the penalty waiver include being furloughed or losing a job, decrease in hours or income, lack of childcare that impacts your working situation, or you or a spouse actually being diagnosed with the virus itself would qualify. For a comprehensive list, you would need to take a look at the bill’s text itself here.

If you did have adverse financial consequences from the virus, it actually might be worth looking at a distribution from an IRA or 401k if you are in a lower bracket than you believe you might be in the future. It’s part of the same thought process as taking an “RMD” anyway, like above. If you will have a significant decrease in income for 2020, it might make sense to take a withdrawal. Another (unmentioned) part of it is using a method that existed before this, a Roth conversion. Which would recognize the income and then put it in a Roth that still has tax-deferred growth potential but eventually can be tax free! Of course, if you need the money from the recent hardship, the planning again takes a back seat to the current need.

Last up is the changes on loans to qualified plans.

The previous amount was the lesser of $50k or 50% of your account value. The new rule is $100k or 100% of the account value.

Quite frankly, this is very dangerous. Even in normal circumstances, 401k loans like this are close to a “last resort” idea. We normally look at other cash options first before signing up for one. There’s risk in borrowing against a 401k and then being terminated or offered a better job, which normally causes the loan to be “immediately” due. Since the reason for the loan is that the money was needed…and spent, paying a $50k loan back is tough when someone has lost their job. When it’s not paid back in a timely manner, there was a penalty if it was an early withdrawal, and then income taxed. I wouldn’t make this decision without knowing all the details and your ability to pay that loan back.

I understand the intention of giving investors the ability to borrow and pay it back, but there is a significant risk of borrowing 100% of someone’s remaining cash/investments for expenses. (Because, I did mention this was “last resort”, right?) So in a scenario that the last $100k was borrowed, and then there is either a loss of a job, or the payments on that loan become difficult to pay, there could be a pretty large tax bill due, with relatively little cash to pay for it. Past taxes is not a nice thing to pay off. One needs to pay the taxes due on the income being generated now and then also pay off another item that is not tax deductible either. There is also often an interest rate being charged by the company lending the money for the 401k loan, so it’s not “free” in the meantime, and leveraging investment dollars does have risk. I’ll underline and bold it here, just to be extremely clear, be very careful of 401k loans.

As a general wrap up, there are certainly some ideas for income tax planning to be efficient with those dollars.

But remember, just because a rule is in place, doesn’t necessarily mean it’s right for you to do. (I’m looking at you, 100% 401k loan.) Something like a Roth IRA conversion might make more sense this year than the new penalty free IRA withdrawal, just due to a decrease in income this year. Of course, please feel encouraged to reach out with questions and perhaps later this year do some some income tax planning as mentioned!


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes.

Contributions to traditional 401(k)s and IRAs may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

Roth 401(k)s and IRAs offer tax deferral on any earnings in the accounts. Withdrawals from the accounts may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the accounts being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth 401(k)s and IRAs. Their tax treatment may change.

Traditional 401(k) and IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional 401(k) or IRA to a Roth 401(k) or IRA. The converted amount is generally subject to income taxation.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Contact your plan sponsor if you would like more details regarding applicable provisions of your specific retirement plan.


Trent Huston
Wealth Coach
California Insurance License #0G24740
17742 Irvine Blvd #200 | Tustin | CA | 92780
p | 714.832.6763
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Trent Huston is a Financial Consultant with securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through AK Financial Group, a registered investment advisor. AK Financial Group and OC Wealth Coach are separate entities from LPL Financial.
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