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How the CARES Act stimulus will impact you and your family

Apr 15, 2020 | RBC Wealth Management


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The ultimate goal of the CARES Act is to provide a dose of stability in uncertain times. It’s more important than ever to work with a financial advisor to ensure your wealth plan remains on track.

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The effects of COVID-19 have been far-reaching, reverberating throughout the economy and reshaping the daily lives of nearly every American. In response, in late March President Donald Trump signed into law the largest relief package in U.S. history – the Coronavirus Aid, Relief and Economic Security (CARES) Act.

“It’s designed to help 90 percent of the U.S. population," says Angie O'Leary, head of wealth planning at RBC Wealth Management–U.S. “And if you look at their extended families, it should help nearly 100 percent of the population."

The legislation provides a series of provisions to assist Americans who’ve found themselves economically affected by the spread of the virus. Several of those provisions will impact high-net-worth individuals (HNWIs) and their families.

Here’s a breakdown of some of the CARES Act provisions:

  • The CARES Act stimulus suspends required minimum distributions (RMDs) for 2020. This includes anyone who turned 70-and-a-half years of age in 2019 (born before July 1, 1949) who were supposed to take their first RMD by April 1, 2020. The provision will apply to RMDs from Traditional IRAs, SEP IRAs, SIMPLE IRAs, and 401(k), 403(b) and Governmental 457(b) plans meant to be withdrawn this year. This change applies to both the owners of the retirement account and beneficiaries who inherited the account taking a stretch distribution.
  • For anyone who has already taken their RMD, there’s a 60-day rollover rule allowing them to pay it back, explains Bill Ringham, director of private wealth strategies at RBC Wealth Management–U.S. “For those who the value of their plan has fallen as a result of the market, having to take out a specific percentage of that requires them to liquidate a larger part of their portfolio than they might have had to," he says. “They now have the option of putting it right back."
  • The act also suspends payments and interest on federal student loans until Sept. 30, 2020.

Retirement plan and IRA penalty-free distributions

The inverse, says Ringham, are changes to the way individuals leverage their qualified retirement savings plans to get them through this potentially economically destabilizing time. “The government has relaxed the rules on how to get money out of your 401(k) without being completely penalized from a taxation perspective," he says.

With the coronavirus relief package, individuals will be able to pull up to $100,000 from their vested qualified retirement accounts as either a penalty-free disbursement or a loan to pay for expenses and disrupted income related to the pandemic.

“The great thing about that distribution is you can take the income (at once or) over three years … you have to pay taxes on it or you have to pay it back, but you're given three years to pay it back," O'Leary says, adding that the payments can be in excess of the normal contribution limits for those three years.

O'Leary points out that for individuals tapping into their retirement accounts, there are some wealth and tax planning considerations. “If this is the year you have a really low income because of a disruption, you might want to pay it all back (as part of your 2020 taxes) because you're going to be in a lower tax bracket," she says.

Charitable changes from the CARES Act

In an effort to enhance and incentivize charitable giving during the COVID-19 pandemic, the CARES Act has made a few changes to deductions surrounding giving, including:

  • The new legislation allows up to $300 given to a qualified charity to be claimed as an above-the-line deduction. It's a permanent change that's available to taxpayers who don't itemize their deductions by claiming eligible expenses.
  • The CARES Act also effectively suspends the limit on individual taxpayers' deductions for cash contributions to public charities for 2020. Prior to the act, individuals could only deduct charitable contributions up to 60 percent of their annual gross income (AGI). That limit has been raised to 100 percent, though the deduction is only for donations made to qualified charities; contributions made to donor-advised funds aren't included in the provision.

Ringham says the legislation is unprecedented and creates an opportunity for HNWIs to give a significant amount to charities this year in a tax-efficient way. “Never before have we been able to offset 100 percent of one's AGI through charitable deductions. It's always been limited by 50, or more recently 60, percent of AGI," he says. “This is a way for nonprofit entities to get money from people and benefit others."

Stability in an uncertain time

The ultimate goal of the CARES Act is to provide a dose of stability in an uncertain time. As HNWIs and families navigate the new economic reality and the corresponding market turbulence, Ringham says it's more important than ever to work with a financial advisor to ensure your wealth plan remains on track.

For some people, that may mean looking at your current goals and readjusting. For others, it's about re-positioning portfolios and strategies to continue growth within the current market. “We're looking at whether you are still meeting your retirement goals and objectives. Do we need to tweak the plan or has it really changed that much even if the market has changed?" says Ringham. “All the way to what opportunities does this present that we should be considering to take advantage of now?"

The act also creates a conversation point for parents to talk with their adult children about what this package means for them and how it could fit within the wider family legacy. “These are conversation starters," adds Ringham. “And we're getting plenty of time to talk to each other these days."

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