CARES Act Updates and Your Retirement

Historically, 70½ is the age when individuals have been required to take required minimum distributions (RMDs) from their retirement accounts, having until April 1 of the following year to take the first distribution.

The SECURE Act of 2018 changed that rule, raising the age for RMDs from 70½ to 72 while the CARES Act 2020 has made further significant changes. Below are important updates you need to know.


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A retirement–related provision of the CARES Act 2020 allows the owners of certain retirement accounts — including inherited and beneficiary accounts — to skip otherwise mandatory RMDs for 2020. This provision applies only to defined contribution plans, including, 401(k) and 403(b) plans, IRAs, SIMPLE IRAs and SEP IRAs.

For those who want to take their RMDs, Cares Act Notice 2020-51 includes a sample plan amendment that provides participants and beneficiaries the option to receive their RMDs.

If you’ve already taken a now-waived RMD for 2020, you may be able to redeposit the funds. However there is a timing factor involved. Generally, such funds must be redeposited within 60 days of the distribution. Under the CARES Act 2020, the deadline for redepositing RMDs distributed in 2020 has been deferred to August 31.

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With respect to repayments, Cares Act Notice 2020-51 eliminates the once-per-year IRA rollover rule, which requires (and allows) only one rollover from an IRA in any 365 day period. It also removes this restriction for inherited IRAs.

The CARES Act 2020 further extends the rollover option to the IRA owner, a beneficiary spouse, and/or a non-spouse beneficiary, as long as the plan participant died in 2019 and the rollover occurs before the end of 2021.

Before the CARES Act 2020, money could not be withdrawn from a retirement account before the age of 59 ½ without incurring a 10% percent early-withdrawal penalty. Under the Act, individuals may be able to take one or more hardship withdrawals from their retirement accounts without penalty if they fall in to any of the following categories:

  • You, your spouse or your dependents are ill, having been diagnosed with COVID-19.
  • You’ve been hurt financially because you are out of work (quarantined, laid off, furloughed)or your hours are reduced.
  • You cannot work or get child care due to COVID-19. 
  • You fall under another COVID-19 category established by the US Treasury Secretary

It’s important to note that such hardship withdrawals are limited to a total of $100,000 without incurring a penalty, unless you are at least 59 ½ years of age. Also, employers can place limitations on withdrawals from their 401(k) and 403(b) plans and those withdrawals are included in your taxable income over a three year period. You can avoid paying the income tax if you repay the withdrawals within the three years.

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The same COVID-19 eligibility categories that govern hardshipwithdrawals also govern retirement account borrowing from current 401(k) and 403(b) plans. (Note: IRAs do not allow for this type of borrowing.)

Pre-Act, the maximum loan amount you could borrow was $50,000, or 50 percent of the vested balance in your account, if lower. Under the CARES Act 2020, you can borrow more. The maximum loan amount is the lesser of $100,000 or the vested balance in your account. Any loan repayments due between March 27, 2020 and December 31, 2020 are delayed for one year. However this one year delay is not factored in when accruing interest charges on the loan, which are based on the rules of your plan.

Ensuring Your Family’s Financial Future

In meeting with and advising our clients, one of their most important concerns is focused on ensuring their family’s future. Within that conversation often comes the question of the best way to leave money to their grandchildren. 

In many ways, leaving an IRA can be a good alternative. The money continues to grow tax-deferred and when the grandchildren do inherit it, they’ll have options about when and how to withdraw the money. However, it’s not quite as simple as just naming them as the beneficiaries.

  • First, the distribution rules can be complicated and each beneficiary may have different needs on when it would be best to distribute the assets most effectively.
  • Second there is the consideration of what happens should grandchildren inherit the money while minors.
  • Third, it’s important to consider how the distributions will be taxed. Below are some points to keep in mind ere are some things to address in advance.

MINORS CAN’T INHERIT AN IRA OUTRIGHT

The age of majority generally ranges from 18 to 21, depending on the state of residence. So it would be wise to consider establishing a custodian, typically the minor’s legal guardian, for young grandchildren. The custodian would manage the money until the child reached his or her state’s recognized age of adulthood. At that time, the child would have complete access to the funds. 

If you don’t designate a custodian, the child’s parent would have to ask the Probate Court to assign a property guardian. To avoid this complication, it would be best to name a custodian (often a parent) as part of your beneficiary designation.


CONSIDER SETTING UP A TRUST

This requires a bit more expense and time (you will need to work with an estate planning attorney), but it will give you more control over how and when the money can be used. For instance, while you might be thinking the inheritance would be used for education or a down payment on a house, a young beneficiary might be more tempted to buy a fancy car. 

The choice of a trust depends on how much money you’re talking about and how concerned you are about your grandchildren handling their inheritance responsibly.


GRANDCHILDREN GENERALLY WON’T BE SUBJECT TO RMDs,BUT THEY WILL HAVE TO DISTRIBUTE THE ASSETS WITHIN TEN YEARS.

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Prior to the passage of the SECURE Act, which became effective as of January 1, 2020, most heirs were able to distribute Inherited IRA assets over the course of their lifetime—with the caveat that they had to take RMDs. However, under the new law, only certain types of beneficiaries have this option, and grandchildren are not one of them (unless they are disabled or chronically ill.)

Grandchildren generally fall under the category of ‘Designated Beneficiary,’ which means that they can distribute the assets however they like, without RMDs each year—as long as all assets are distributed within 10 years. 

In other words, your grandchildren can take some assets out each year or just leave all the assets in the account until the last day. However, any assets that are not distributed by the end of the 10th year will be subject to a 50% penalty.

How the assets are distributed within that time frame could have important tax considerations, so it’s best to consult with a financial advisor. Because of the SECURE Act rules, if you are married, in some cases it may make more sense to name your spouse as the designated beneficiary to take advantage of spreading the distribution over his or her lifetime and then they can name your grandchildren as beneficiaries.


UNLESS YOUR IRA IS A ROTH, THE GRANDKIDS WILL MOST LIKELY HAVE TO PAY INCOME TAXES ON DISTRIBUTIONS.

Distributions from earnings and deductible contributions from a traditional IRA are considered ordinary income, so unless you’re passing on a Roth IRA that was established for at least 5 years or more prior to your passing, taxes will be due on distributions. 

If the Roth five-year holding period has not passed, the earnings are taxed at ordinary income rates. Your grandchildren will have to pay income taxes on distributions at their own tax rate or they can wait until the five years holding period has passed to receive tax-free distributions.


THREE PRACTICAL CONSIDERATIONS

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1. It’s best that your grandchildren (or their custodians) understand that they will not be able to make additional contributions to an inherited IRA (however, if they have earned income, their parents can set up custodial IRAs for them). 

2.It is important for everyone to understand that your grandchildren would not be subject to the 10% early withdrawal penalty, regardless of their age when they take a distribution. 

3.The inheritance may have an impact on student financial aid considerations for your grandchildren. Consider all of these issues into your overall plan.


Naming a grandchild as an IRA beneficiary can be a tax-smart way to pass on money—both for you and for your grandkids. You just want to make sure that you set it up to everyone’s best advantage now, so it can truly be an advantage to the kids later on. 

Want to know more? Give us a call at 716-256-1682, or email info@noteadvisor.com and let’s make an appointment to help you ensure your family’s future.


This article was excerpted from an online post written by Carrie Schawb Pomerantz, CFP®, Board Chair and President, Charles Schwab Foundation; Senior Vice President, Schwab Community Services, Charles Schwab & Co., Inc.; Board Chair, Schwab Charitable.

Retirement: Lifetime Payments or Lump Sum?

According to the U.S. Labor Department, in 1975 there were more than 103,000 employee pension plans in place as retirement income for Americans. By 2017, that number had dropped to about 46,700. Further, the number of private pension plans — which employers fund on behalf of workers — has also dwindled as companies have shifted the burden of retirement savings to their employees through 401(k) plans or other defined-contribution plans. 

As a result of those changing realities, retiring workers now face their retirement decisions of lump sum or lifetime pension payments with concerns over whether their employers will be willing and/or able to meet the long-term commitments of their plans.

Most retirees like the idea of guaranteed income for the rest of their lives, which makes choosing continuing payments more appealing. However, today’s financial reality is that the stability of pension payments depend on the solvency of the sponsor. And while the federal Pension Benefit Guaranty Corporation (PBGC) would step in if a company could not meet its obligations, it may pay only a certain portion of an employee’s promised benefits. 

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The PBGC’s multi-employer insurance program currently coversthe pensions of 10.8 million Americans. The corporation also pays monthly retirement benefits, up to legal limits, to about one million retirees whose plans ended or failed. Concerningly, the agency’s most recent annual report shows that it is currently stretched to its limits, with forecasts of insolvency by the fiscal year 2025. 

So what is the best choice to make? Below are some facts that may help in your decision-making process.

  • For those eyeing a lump sum due to fear of their employer going under or otherwise struggling to meet their pension obligations, it’s important to be aware of the fact that the lump sum amount offered is generally lower in comparison to the amount promised over time. That being said, because interest rates have generally remained low, recent lump sum offers have been bigger than if rates were high. . 
  • In choosing to remain in the pension plan instead over a lump sum, the amount received may be fixed-for-life as pensions typically don’t have a cost-of-living adjustment.
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  • Although some pensions offer spousal benefits (i.e., upon death, the husband or wife continues to receive a portion of the lifetime payments) there is nothing left for heirs. In contrast, in taking a lump sum, upon death there may be money that could be left to non-spousal heirs. 
  • Choosing a lump sum and not rolling it into an individual retirement account or other qualified option will result in taxes on the distribution. Alternatively rolling the money to an IRA, will require decisions on the best ways to invest the assets to meet retirement income needs
  • An alternative option is to purchase an annuity, which would provide guaranteed income for either a set number of years or for the remainder of the investor’s life, depending on the type. However, it’s significant to keep in mind that to help meet those payout obligations, insurance companies invest in stocks, which means your investment is one step removed from market investments. Additionally, there is always the risk of the insurance company going belly up. 

At the end of the day, any decision on retirement should be made in the context of the retiree’s financial plan and the long-term viability of all the companies involved.

Financial Planning Lessons

When the COVID-19 pandemic hit the United States, the lives of Americans were quickly turned upside down. Now, three months later, many have suffered personal financial disasters due to the loss of jobs and paychecks.

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There are a number of financial lessons to learn from this pandemic, chief among them the value of planning and having emergency funds. Without such funds, you can be forced to tap other accounts, take out a loan, or face more dire and damaging financial options.

So what should you do if you do not have an emergency fund set aside to cover your expenses for a few months?

1) To begin, start one as soon as you can. Divert money into the account whenever possible. If you do already have an emergency account, continue to add to it.

2) Review expenses related to your job. Consider the money you spend on transportation costs, clothing, dry cleaning, entertainment, meals and those daily coffee runs. Where you can cut costs, take that money and put it in a place where it can grow.

3) If you are worried about losing your job, or if you already experienced a pay cut, find ways to reduce your overall spending by 20% or more. Separating essentials from non-essentials is a good way to eliminate things you do not need.

4) Do not overlook the importance of estate planning and investing in your retirement. Continue to contribute to your 401K, and if you have to borrow from it, do not drain it.

5) If the events of the last three months have encouraged you to think about drawing up a will, now is the time. Also, update any estate planning that needs to be done, as well as end of life directives. 

All of the above are integral parts of proper financial planning which, as COVID-19 has reminded us, are important lessons to learn and follow.

Help Your Finances and Soothe Your Mind

With May designated as Mental Health Month, it seems timely to focus on the important part finances play in our sense of well-being.

Below is information related to understanding the ways money management skills can affect people’s happiness, along with practical steps to stay financially and emotionally healthy.


THE EMOTIONAL SIDE OF MONEY

Do you ever feel overwhelmed by money worries? You’re not the only one. 

According to a 2019 survey by CompareCards.com, seven in ten Americans admit that they’ve cried over something related to their finances. Additionally, age and gender aside, many acknowledge money as an emotional trigger.

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In a 2018 Harris Poll, it was revealed that money was a major source of stress for 44% of respondents. Specific financial stress inducers included low income, the rising cost of healthcare, too much debt and a lack of retirement savings.

These findings are troubling not only because of the significant percentage of Americans who are struggling with money concerns, but because of how those concerns can impact our lives.

FINANCIAL ANXIETY AFFECTS MORE THAN A SPREADSHEET BOTTOM LINE

A number of studies show that financial insecurity leads to a host of other problems from general stress and anxiety to poor physical health and reduced job performance.

Within the medical industry, worries about the cost of healthcare are being defined as, “financial toxicity,” as patients struggle to pay for health and hospital care and prescriptions. Worry about large medical bills and related debt have been proven to cause illness and even increase the amount of pain people feel.

When financial stress hits close to home, it can cause relationship problems among spouses, parents, children and even friends. Additionally children raised in poverty have been shown to suffer from far-reaching physical and mental health issues.

While these are concerning statistics, a 2015 Gallup poll regarding the link between relationship problems and financial well-being offered hope. According to those who participated, the solution to reducing stress and increasing financial security wasn’t as much about the amount of money individuals possessed, but more about how well they managed their money. The good news is that managing money is something everyone can control.


WHAT YOU CAN DO TO FEEL MORE FINACIALLY AND EMOTIONALLY SECURE

Worry is caused by uncertainty. While you can’t know what lies ahead, you can take steps to get a better handle on the present and more fully prepare yourself for the future. The following basic money management tips can help

Know where your money is going

  • Write down your monthly expenses. How much are you spending on essentials like housing, food and transportation? How much are you spending on extras? Make adjustments so that you don’t spend more than you earn.
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Get a handle on debt

  • If you’re carrying credit card balances, create a payment plan that is realistic and that you can manage. Try to pay more on higher interest debt first, making sure to pay at least the minimum on all debts, including student loans.

Plan for emergencies

  • Aim to put aside enough cash to cover 3-6 months of essential expenses in a savings or money market account. Starting from scratch? Aim for whatever regular amount you can afford and work your way up from there. Acknowledge there may be months when your ability to reach that aim will fall short, but don’t give up. Next month get right back on your savings track.

Boost your savings

  • Make savings a part of your monthly budget. Even a small amount saved on a regular basis can make a big difference.

Contribute to your 401(k)

  • Contribute at least enough to get the company match, more if you can.

Take advantage of workplace financial wellness programs

  • See what your company offers in terms of retirement planning, healthcare, and financial education and planning.

MONEY MANAGEMENT AND HAPPINESS

There’s one more Gallup poll that offers particularly positive results. It found that among Americans worried about paying bills, 63% said they enjoyed saving more than spending.

Saving as much as you can, controlling your expenses, and feeling like you’re in control can reduce your financial stress and help you maintain a positive attitude no matter what life throws your way.


This blog was excerpted from an online article by Carrie Schwab-Pomerantz, CFP®, Board Chair and President, Charles Schwab Foundation; Senior Vice President, Schwab Community Services, Charles Schwab & Co., Inc.; Board Chair, Schwab Charitable

Refinancing Your Home. Good Idea or Risky Gamble?

The current low interest rates can make it a great time for some homeowners to refinance. What’s important to note is that changes in interest rates affect fixed and adjustable mortgages differently.

While adjustable rate mortgages may be affected by short-term rate changes, fixed mortgage rates tend to be more closely aligned with the 10-year Treasury note.

If you have an ARM, a decrease in the short-term federal funds rate may lower your rate. If you have a fixed-rate mortgage, you should instead pay attention to long-term bonds like the 10-year Treasury note

Rates aside, deciding whether or not to refinance depends on a number of personal factors.


WHAT’S YOUR GOAL?

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Do you want to lower your monthly payment? Reduce the length of your mortgage? Take out extra money for home improvements? These are important initial questions.

If decreasing your payment is a top priority and you can lower your interest rate by .5 to 1 percent, it’s probably worth the effort. For instance, lowering the interest rate on a $350,000 30-year fixed mortgage by 1 percent could lower your monthly payment by about $300 a month.

On the flip side, if your goal is to shorten the length of your mortgage and you refinance that amount for 15 years, your monthly payment would go up, but you’d save a considerable amount in interest over the life of the loan.

HOW LONG WILL YOU BE IN THE HOUSE?

Refinancing usually involves paying points and fees. Points basically represent interest you pay upfront to get a lower rate on your loan. It’s not uncommon for points and fees to add up to 3-6 percent of your loan. You can pay this out of pocket or, often times, add them to the balance of your loan.

However you pay them, it will take time to get to the breakeven point where these additional costs are offset by the lower rates, so you have to think realistically about how long you intend to be in your home. If you plan to sell in the near future, the extra cost of refinancing may outweigh the monthly short-term savings.

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HOW MUCH HOME EQUITY DO YOU HAVE? 

Do you want to lower your monthly payment? Reduce the length of your mortgage? Take out extra money for home improvements? These are important initial questions.

If decreasing your payment is a top priority and you can lower your interest rate by .5 to 1 percent, it’s probably worth the effort. For instance, lowering the interest rate on a $350,000 30-year fixed mortgage by 1 percent could lower your monthly payment by about $300 a month.

On the flip side, if your goal is to shorten the length of your mortgage and you refinance that amount for 15 years, your monthly payment would go up, but you’d save a considerable amount in interest over the life of the loan.

DO THE MATH

Refinancing usually involves paying points and fees. Points basically represent interest you pay upfront to get a lower rate on your loan. It’s not uncommon for points and fees to add up to 3-6 percent of your loan. You can pay this out of pocket or, often times, add them to the balance of your loan.

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However you pay them, it will take time to get to the breakeven point where these additional costs are offset by the lower rates, so you have to think realistically about how long you intend to be in your home. If you plan to sell in the near future, the extra cost of refinancing may outweigh the monthly short-term savings.

Refinancing usually involves paying points and fees. Points basically represent interest you pay upfront to get a lower rate on your loan. It’s not uncommon for points and fees to add up to 3-6 percent of your loan. You can pay this out of pocket or, often times, add them to the balance of your loan.

However you pay them, it will take time to get to the breakeven point where these additional costs are offset by the lower rates, so you have to think realistically about how long you intend to be in your home. If you plan to sell in the near future, the extra cost of refinancing may outweigh the monthly short-term savings.


This post was excerpted from an online article by Carrie Schwab-Pomerantz, Board Chair and President, Charles Schwab Foundation, Senior Vice President, Charles Schwab & Co., Inc. and Board Chair, Schwab Charitable