"If I'd have had more time, I'd have written a shorter letter"
~Blaise Pascal
Welcome to the first edition of Cascade Financial Management’s new series, “Notes to Know”. With the myriad of data flooding the media surrounding the current economy and COVID-19, we wanted to help curate some of the most salient information and make it available to you in quick, periodic, actionable 1-minute reads. Taking Pascal’s advice on the matter of putting more time into the message than the message itself, we have structured these notes around bullet points designed to stimulate questions and further thought and conversation, not editorial opinion. We hope you find it a minute well spent.
The CARES Act
There are several areas that impact access to funds from retirement accounts. Here are the few we are seeing the most confusion about: REQUIRED MINIMUM DISTRIBUTIONS (RMDs): If you are at the age where you are required to take money out of your IRA (age 72 or possibly earlier if you’d already started RMDs) please note the below changes:
You are no longer required to take your RMD for the tax year 2020.
~ The advantage is that you will reduce your potentially-taxable income by the amount you do not take out.
~ Additionally, the money has the potential to benefit from another year of tax- deferred growth (dependent on future tax law).
In some limited cases, you may be able to “Rollover” distributions already taken in 2020 to reduce your tax burden.
You can, however, choose to take what you desire without penalty, (assuming you are 59 ½ or older) paying only the normal tax due.
EXPANDED ABILITY TO BORROW AGAINST QUALIFIED RETIREMENT PLANS:
This DOES NOT apply to IRA accounts.
Each plan varies, but many 401(k)s allow participants to borrow against their vested balance.
The limit to borrow, pertaining to “Coronvairus Related” circumstances, has increased to $100,000.
You will pay your plan back, plus pre-determined interest.
PROS:
~ You get penalty-free access to capital.
~ You are paying interest to yourself.
CONS:
~The money you loan to yourself is not exposed to the market, per your investment plan, meaning the amount you borrow will not participate in any market recovery.
~If you leave your employer, the amount of the outstanding loan might have to be paid back or will become taxable and subject to early withdrawal penalties (We have seen nothing in the legislation about this yet).
EXPANDED ABILITY TO TAKE HARDSHIP WITHDRAWALS:
Hardship withdrawals have been expanded to cover “Coronavirus Related” circumstances.
Distribution limit has also increased to $100,000.
10% Penalty for early withdrawal is waived, though income taxes will still be due for the tax year the distribution is taken.
Taxes can be recovered if the distribution is paid back within three years.
There are specific tax and planning issues that revolve around each of these concepts.
This Note is not meant to be comprehensive, nor is it intended as planning or tax advice for any individual.
If you have questions, contact your Cascade advisor or info@Cascade-inc.com.
Make it a great day!
*On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), a sweeping stimulus bill intended to bolster the U.S. economy, among other things, and provide emergency assistance to qualifying businesses and individuals. There can be no assurance these interventions by the government will be successful. Cascade Financial Management, Inc. is not a tax or legal advisor. While the information provided is not intended to replace discussions with your tax advisor, it may help you to comprehend the tax implications of your investments and plan efficiently going forward. Your tax and financial situation is unique and you should not take any action or make any investment decisions without first discussing your particular situation with your CPA, tax, or legal advisor.