Provisions in the 2020 Stimulus Plan that Affect your Retirement Accounts and Income Taxation

by: P. Lewis Robinson, CPA

Retirement Accounts Required Minimum Distributions (RMDs):

•  For the calendar year 2020, no one will have to take a required minimum distribution from any individual retirement accounts or workplace retirement savings plans, like a 401(k). That way, you aren’t forced to sell investments that may have fallen in value, which would lock in losses. If you don’t need the money now, you can let the funds remain invested in expectation that they will recover.
• If you took your 2019 or 2020 RMD within the last 60 days, you are also in luck. You can roll over your distribution to the same or a different IRA within 60 days of the prior distribution and not pay the income tax on the withdrawal (as long as you have not made an IRA Rollover within the 365 days preceding your distribution).
• Normally, RMDs cannot be converted to Roth IRAs, but now since there are no RMDs, you can withdraw IRA funds at low values and low tax rates and convert them to your Roth IRA. Yes, you pay taxes on the conversion, just like you would have on your RMD. Now, under this 2020 RMD waiver period, you can get more for the tax you pay by being able to convert the funds you withdraw to your Roth IRA at a relatively low tax cost.

Provisions to withdraw funds without paying a 10% penalty:

• You can withdraw up to $100,000 from your retirement accounts this year without the usual 10 percent penalty for being under age 59 ½, if the need for the funds is a result of COVID-19.
• You will also be able to spread out any resulting income taxes that you owe over three years from the date you took the distribution. And if you desire, you could put the money back into the account before those three years are up, even though the rules may normally keep you from making that large of a contribution.

Borrowing from 401(k):

• You can take out twice the usual amount. For 180 days after the passing of the bill, with certification that you’ve been affected by the pandemic, you’ll be able to take out a loan of up to $100,000. The normal rule limiting the withdrawal to half of your balance has been suspended.

Charitable Contributions A deduction for charities even if you don’t itemize:

• $300 per year without having to itemize deductions
• To qualify, you must give cash to a qualified charity and not to a donor-advised fund. You may be aware of donor-advised funds, as we often recommend these charitable accounts to batch contributions in a particular year in order to maximize deductions and to accomplish other objectives. If you’ve already given money since Jan. 1, that contribution counts toward the $300 cap.

Limits on annual contributions have been lifted:

• As part of the bill, donors can deduct 100 percent of their gift against their 2020 adjusted gross income.
• If you have $200,000 of income, you can give $200,000 to a public charity and deduct the full amount in 2020.
• The new deduction is only for cash gifts that go to a public charity. If you give cash to, say, your private foundation, the old deduction rules apply. And while the organizations that manage donor-advised funds are public charities, you do not get the higher deduction for donating cash to your donor-advised fund.

If you have any questions about how these changes might impact your financial plan, please contact your local CapSouth office or 800.929.1001.

To learn more about CapSouth Wealth Management, please visit our website at www.CapSouthWM.com

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. CapSouth does not offer tax, accounting, or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information.