Understanding the CARES Act’s Impact on Your Finances - Adviser Investments

Understanding the CARES Act’s Impact on Your Finances

April 15, 2020

Episode Description
FEATURING Andrew Busa and Diana Linn

The federal government’s $2-trillion virus relief bill, the CARES Act, is intended to help dull the economic pain the pandemic is causing—and many provisions in it may affect your family and your finances. Financial planners Andrew Busa and Diana Linn sat down for a special episode of The Adviser You Can Talk To Podcast to help you understand some of the big changes you should be aware of in this bill—and offer some strategies it opens up that you can use in your own financial planning.

This two-part podcast discusses the bill’s most important provisions, such as:

  • Direct payments to taxpayers
  • RMD waivers for 2020
  • COVID-related withdrawals from retirement accounts
  • Unemployment benefits

Diana and Andrew also review some financial planning strategies you may want to consider, including:

  • Evaluating a Roth conversion
  • Boosting charitable giving
  • Extending retirement contributions

There’s plenty more to say about the CARES Act—for additional details about the RMD waivers, check out our post here, and for a broader overview of the Act, click here. We’ll continue to dive into the details of the legislation in the coming weeks—you can find those posts and all of our ongoing coronavirus coverage here. And if you have specific questions regarding how the CARES Act may impact you or someone you know, please don’t hesitate to contact your wealth management team. Click the play button to listen now.

Episode Transcript

Andrew Busa:
In response to the coronavirus global pandemic, Congress has passed a $2-trillion stimulus package in order to help ease the economic effects that this virus has and will cause. In this podcast, not only will we cover what was in the Act, but also how it impacts you and your financial plan.

Andrew Busa:
Hello, this is Andrew Busa and I’m a financial planner here at Adviser Investments. We’re here with another Adviser You Can Talk To Podcast. Today I’m joined by my colleague, Diana Linn, a fellow financial planner and CERTIFIED FINANCIAL PLANNER™ at Adviser Investments.

Diana Linn:
Hey Andrew, thanks for having me.

Andrew Busa:
Absolutely. The reason we’re here today is to talk about the fact that on March 27, the Federal Government passed this CARES Act, the Coronavirus Aid Relief and Economic Security Act. This is a big deal because the government basically said we’re going to have this trillion-dollar package that we’re stimulating the economy with to try to dull the economic blow that this virus has and will continue to have on the economy, both for individuals and companies. So, this is a big deal.

 

Today, we want to give you, the listeners, just a broad overview of what changes to be aware of in this bill, especially as they might relate to your financial plan. So, you can see this as timely and important.

Andrew Busa:
We want to split this podcast up into two parts. First, we’ll give you a broad overview of just what has changed and what the government decided to do to help out individuals and businesses. Then in the second part, we’ll talk about some planning strategies and action items that you might want to think about as it relates to these changes. Because not all of the changes may affect you, and some may have a bigger impact than others.

Diana Linn:
You may not be aware that there is something that you can take advantage of as part of this CARES Act. So yeah, I think this is a good plan.

Andrew Busa:
Exactly. Any other thoughts before we dive in to part one, just what’s changed?

Diana Linn:
No, I like it. Let’s dive in.

Andrew Busa:
All right, let’s do it. So broadly, really there are five categories to think about when looking at what the government intended to change here. There are the direct payments to taxpayers. That’s probably the most visible and gotten the most attention.

Diana Linn:
Right, and probably affecting the most people as well, I’d say.

Andrew Busa:
Yep, exactly, so we’ll get into that. There’s also required minimum distributions (RMDs) being waived in 2020, that’s been a very high-profile item as well. There are also some new changes around COVID-related withdrawals from retirement accounts. Of course, small-business relief, that’s been a big part of this bill as well. The government also beefed up unemployment and other ancillary benefits like Medicare, student-loan relief, things like that. So, smaller tweaks around the edges, but those are the big categories. All right, Diana, so take us through that first one there, direct payments to taxpayers. How exactly is that going to work?

Diana Linn:
Sure. The direct payment to taxpayers, this is affecting the majority of Americans today and it’s already beginning to roll out. Congress has authorized one-time payments of up to $1,200 per individual taxpayer. If you filed your taxes last year as a single-file taxpayer, and you have an AGI of up to $75,000, you’re going to receive a check of $1,200. It’ll be paid to you however you paid your taxes last year. So if you had direct deposit, they’re going to use that banking information to just directly pay you back that $1,200.

Diana Linn:
In addition to that, you also receive a $500 payment for each qualifying dependent child. So, when you filed your taxes last year, if you had a dependent child up to the age of 17, you’re going to receive $500 per child. That payment will be increased up to $2,400 if you filed as a married filing jointly couple with an AGI up to $150,000.

Diana Linn:
Of course, those stimulus payments are going to be reduced if you are above that threshold. So, the $1,200 or the $2,400 payment will be reduced by $50 per $1,000 of AGI you are above that limit, and the payment of the $500 per qualifying dependent child is also based on AGI. If you are a single filing taxpayer with an AGI income at around $99,000, that’s where you’ve really pretty much phased-out of receiving any of this benefit back, and that $500 per child will also be adjusted down.

Andrew Busa:
That’s a good thing to keep in mind. Remember too that the IRS is basing this on your most recent tax return. So, if you haven’t filed your 2019 taxes yet, they’ll be basing this on your 2018 filing. So, just something to keep in mind there. Of course, the tax deadline has been extended to July 15, so if you haven’t filed your taxes yet, you have extra time to do that.

Andrew Busa:
Another thing to keep in mind too, you mentioned the direct deposit. I think just a good housekeeping item for listeners is to just go to irs.gov and just make sure that they have your direct deposit information on file if you believe that you’re eligible to get a payment. Actually, their tool will tell you if you’re eligible to get a payment.

Diana Linn:
And don’t panic if they don’t have your direct deposit information; they’ll send you a check. If you are entitled to any portion of this stimulus payment, the government will be sure that you receive it.

Andrew Busa:
Right, exactly. Again, this item has received a lot of attention and rightfully so. You want to make sure you get that money that’s owed to you if you’re eligible. But thanks for taking us through that one. Then another change that’s received a lot of attention is the provision here that’s going to waive all required minimum distributions for 2020, so this is a major change, right?

Diana Linn:
This is huge. I think this must be also probably the one of the most beneficial ones. If you are over that in 2019 that magical age of 70½ where you had to start withdrawing out of your retirement accounts, and you’re required to take out a minimum amount each year, this is being waived for 2020. Which is huge because as these markets have been so volatile during this time of the coronavirus, if your portfolio has taken a bit of a hit in this down market, having to withdraw money from that, it’s adding extra salt into the wound. So, being able to waive that and say, “I’m not going to take out my payment right,” now is a huge relief. If you don’t need that money, it’s best to just let it be for this year.

Andrew Busa:
Yeah, absolutely. Let it continue to grow tax-deferred. Also, it’s money that when you take out your RMD, of course, you’re taxed on that money, so a win there all around. Remember, this waiver applies to a broad range of retirement accounts. We’re talking about traditional IRAs, SEP IRAs, SIMPLEs, inherited IRAs, too.

 

If you have an inherited IRA, you don’t need to take that RMD. So, just keep that in mind there. We have the details on our website that we can link in the show notes to get a little bit more into the weeds there for folks. Now, another question around this topic is what if you already took your RMD because we’ve gotten a lot of questions about that from clients.

Diana Linn:
We have, we’ve gotten a lot of questions about this from clients. Especially some clients that take a little bit of their required minimum distribution each month. Or, at the first thing in the beginning of the year, took out their full required amount for 2020 and now this, “Oh no, I didn’t have to take it out. Can I put it back?” In short, the answer is yes, you can. You are eligible to do a 60-day rollover one time a year. If in the past 365 days, you have not done a rollover, you are able to take this distribution that you have taken out and put it back into your IRA.

Diana Linn:
What I mean by if you already taken a rollover in the past 365 days, if you’ve recently retired and you took your employer’s plan sponsored retirement plan, the 401(k) or something similar and rolled that into your IRA in the past 365 days, unfortunately you would not be able to put the money back if you took out some of that required minimum distribution. But if you haven’t, and you took any money out of your IRA between the timeframe of February 1st also into the future of May 15, you can put that money back, just one payment of it. If you are one of these clients that takes a little bit out each month and uses that to help offset the bills and expenses, you’re only able, unfortunately, to put one of those distributions back.

Andrew Busa:
Right. If you’re eligible to do it, to put it back into your IRA, would recommend it. Just because again–

Diana Linn:
Oh, absolutely.

Andrew Busa:
Right, it allows the money to continue to grow for another year, tax-deferred, and it’s less income tax for you to have to pay this year.

Diana Linn:
Exactly.

Andrew Busa:
The IRS also issued a notice just last week that lets anyone who took an RMD between February 1 and May 15 to put the money back by July 15th, again if you’re eligible. So really, it’s extended that 60-day rollover deadline in a way is how I’m understanding it. Is that right?

Diana Linn:
Yeah, no, I think you hit the nail right on the head. If you are falling into this category and this is something that interests you, you don’t need the money, you’re curious about how to put it back, please reach out to your adviser or your financial planner. They will certainly work with your unique situation to make sure this is taken care of correctly.

Andrew Busa:
Right. I know we mentioned inherited IRAs before, where you don’t need to take the RMD there. Unfortunately, if you already took your RMD from an inherited IRA, you are not eligible to put that money back into the account, even if it’s within that 60-day rollover. So, that did not make the cut for the bill. The only exception there is if you’re a spouse, if you’re the beneficiary of a spousal-inherited IRA, then you would be able to roll that into your own retirement account.

Diana Linn:
Right, so only if the money, if you are the beneficiary if your spouse passed away, and you rolled that over into your own personal IRA rather than setting up and establishing it as an inherited IRA, that’s the only way that you would be able to put the money back, yeah, correct.

Andrew Busa:
Right. Sort of in this same vein, talking about a third big change is a relief provision around allowing taxpayers to tap into your retirement account without penalty. This could be helpful for folks who have been hit hard by this virus and, let’s face it, who hasn’t been?

Diana Linn:
Right, sure. If you, unfortunately, maybe have been laid off or furloughed due to the stay-at-home orders in place, if you are in a pinch and you need to tap into your retirement accounts before you’ve hit that age of 59 and a half, you can so, and you will not be required to pay the 10% penalty. You will, of course, have to pay taxes. But another nice caveat that they put into the CARES Act is that you can spread those tax payments out over the course of the next three years. If you have to pull out of your portfolio, which you’re allowed to do up to a $100,000, you don’t have to take that huge tax burden this year while you’re also not having any income.

Andrew Busa:
Right. There’s a whole list of events that qualify you for this type of distribution. We won’t get into that here. But if you believe you’ve been affected economically or your spouse was affected by the COVID-19 crisis here, definitely reach out to your adviser, your CPA. But that’s important to talk about. I would also just throw in if you don’t need to tap into that account, would recommend not. I still see it as a last resort just because that is your nest egg. You want to leave that to continue to grow. But it is there if you need it, which is a nice little provision that they threw in.

Diana Linn:
So again, talk to your financial planner or your adviser to really evaluate all of your options before dipping into that retirement account. Because those assets we really want to save for when that time comes for when you retire.

Andrew Busa:
Yeah, absolutely. So, all right, good. Again, just to recap what we’ve talked about so far, we’ve talked about the stimulus checks and we’ve talked about provisions around RMDs and coronavirus-related withdrawal. So, those are three big changes that we’ve taken you through. Another one we’ll focus on now, shifting gears, is the provisions around small-business relief. Now really, Diana, a lot of this is being hammered out as we go, I think. There’s news about this every day. But broadly, what was the aim here? What was the vision of the government as you see it?

Diana Linn:
Yeah, I think you’re right. I mean, this is still continuing to evolve as the small businesses are really the heart of America. Anyone that owns, you own a hair salon or a small grocery store, you have your own personal training business, and you’re unable to keep running as everyone is social distancing and not shopping in your brick and mortar stores. The government is really trying to help keep these businesses afloat during this time until we are able to go back to life as it was before. If you do own a small business that has been impacted by the virus with less than 500 employees, you are able to take out a loan of up to $10 million.

Diana Linn:
Now, these loans are, of course, first-come first-serve, so there’s a catch-22 where you want to, if you are a small-business owner, “Hurry up. I want to try to apply for this loan because I want to be sure I’m entitled to some of the funds that are out there, part of that pool.” But on the downside of that is as things are still being ironed out, if you are one of those that have already taken the benefit upfront and later down the road, there’s a benefit that maybe suits you a little better, if you’ve already applied, you aren’t unable to apply for something later down the road.

Diana Linn:
Also, I think some of the banks aren’t quite up to speed yet with exactly what these rules are. We’re all in this unknown of what exactly are the parameters we’re working with here? So, as a small-business owner, even if you were to go to a bank right now and try to apply for the loan there, you might run into a little bit of red tape so to speak.

Andrew Busa:
Yeah, absolutely. The other part of this too is that the loan is eligible to be forgiven up to $10 million. Now, basically the language that we’ve been given here is that the borrower, you need to certify that the funds will be used to retain workers, maintain payroll, make mortgage, lease, or utility payments. In order to be granted that forgiveness, you need to require documentation of payroll and business costs there. So, it’s really still being figured out as we go it seems like.

Andrew Busa:
But, I guess, my recommendation for this is if you believe you’re eligible, speak with your lender, speak with your bank to see if they’re eligible to take part in the SBA loan program, Small Business Association, and obviously speak with your adviser will help you think through this. Because I think, like you said, Diana, there’s going to be some red tape to fight through here.

Diana Linn:
Yeah, but I think this is an important one, so we can continue to update. Maybe we can add links to this podcast with updates as they become available.

Andrew Busa:
Absolutely, yeah. I know we’re writing a bit more about this topic specifically, so look out for that. So, good. Thanks for clearing that one up for us. And really, before we move into part two, just to cover some ancillary benefits that the government put into this bill, they included improvements to unemployment benefits, right?

Diana Linn:
Right, yeah, the government is really trying to lessen the blow of this hardship to Americans. So, if you are one of the millions of people that have been laid off or furloughed during this time period and are filing for unemployment, they are making some adjustments. They’re going to be increasing your umemployment compensation by $600 per week for four months, so that’s a nice extra bump.

Diana Linn:
Then also eliminating that one-week waiting period. So typically, when you file for unemployment, there’s a one-week waiting period before you start to receive benefits that is going to be thrown by the wayside for now. If you file and you’re eligible, there’s no waiting period, and then you’re going to see a nice little bump up of $600 per week.

Andrew Busa:
Okay, good. You can really see as a listener here, the government took a very broad scope and said, “How can we support individuals and families through this very difficult time?” We touched on here again those unemployment benefits, we talked about small business relief, as well as waving RMD provisions, Coronavirus-related distributions, as well as stimulus checks to individuals and families.

Andrew Busa:
There’s other things here that we covered in our CARES Act blog posts that we’ll link in the show notes that talks about a little bit more about some Medicare provisions that were included, as well as the student loan relief and changes around charitable contributions. We’ll talk a little bit more about those charitable contribution changes actually in part two here, which we’ll move into what actions should you be taking, if any.

Diana Linn:
So Andrew, what are you seeing, as a financial planner working with clients with all of these different provisions, in the CARES Act? What are the main actions that you’re seeing clients take here?

Andrew Busa:
What I’m seeing is an opportunity potentially for some tax-planning here. Because, so if you’re someone, you didn’t have to take your required minimum distribution this year, that means that you could potentially be in a lower income tax bracket than you were last year. In years where you are in a low tax bracket, those are opportunities to take advantage of. So, how do you take advantage of something like that? Well, you could do potentially a Roth IRA conversion if that’s a fit for you. This is where you would take money from your traditional IRA, move it over into your Roth bucket, pay taxes on it. But then once it’s in your Roth, you never have to pay taxes again. So again–

Diana Linn:
Or take a required minimum distribution. So you’re elongating that ability of not taking required minimum distributions if you make that Roth conversion now, right?

Andrew Busa:
Yep, exactly. You’re thinning out that IRA for down the road potentially lessening the RMDs that you would need to take in future years. So again, the opportunity there is because if you’re in a lower income tax bracket than you usually find yourself in, you might have more room in your tax bracket to move over some of that money.

Andrew Busa:
And typically when the market isn’t performing very well, which obviously we’ve had a lot of volatility recently, there the opportunity to do Roth conversions is even greater. There’s a double benefit there to doing that. So again, if you are someone who’s in a lower income tax bracket this year, talk to your financial planner, your financial adviser, and we would be happy to draw up some illustrations for you to show you how you might benefit from doing something like this.

Diana Linn:
Right. No, I like that. Now what if I am someone that I use a portion of my required minimum distributions for qualified charitable donations, or QCD? Are there any changes to planning that I should be thinking about here?

Andrew Busa:
Right, that’s a common question that we receive from clients too because RMDs don’t need to be taken this year. So, can you still do a QCD, and the answer’s yes. As long as you are at least 70½, you are still eligible to make a qualified charitable distribution. It’s still a great strategy to take advantage of if you are already charitably inclined, and you’d like to use your pretax money to achieve your charitable goals.

Andrew Busa:
And again, it’s potentially a way to thin out your traditional IRA or account that you need to take a RMD from in future years, potentially lowering that for future years. So, it’s still a viable strategy. I think it depends from person to person. But broadly too on the charitable front, the typical provision has been you are only eligible to make contributions up to 60% of your AGI.

Diana Linn:
I was just going to ask you about this. You read my mind.

Andrew Busa:
Yeah, there you go. That 60% has been thrown out the window for 2020, and you can actually contribute up to 100% of your AGI.

Diana Linn:
That’s huge.

Andrew Busa:
Yeah, I mean, that could be a big opportunity for some folks up there again for cash contributions to a qualifying charity. So that’s something to keep in mind too. There are some changes around charitable contributions to keep in mind here.

Diana Linn:
I like it. Are there any strategies for a small business owner that you want to mention here?

Andrew Busa:
Well, I think again, since this is one that’s really evolving, I think the takeaway here, contact the planning team. We’ll help you think this through depending on what your individual situation is. Who your lender is, just what your network looks like, because that’s going to that’s going to vary depending on if your bank has even prepared to take applications. Because there’s going to be a huge demand for this as the economic ramifications of this virus start to spread. This is a tough one, but I think just contact us, contact your adviser, we’ll help you think this one through.

Andrew Busa:
And another one not to miss, and again, we didn’t spend too much time on this, but again, the tax filing deadline was extended to July 15. So, what also does that mean? It means you can contribute to retirement accounts until July 15.

Diana Linn:
Right, yeah, that’s huge. If you haven’t made that contribution to your IRA account yet, you still have a couple of months left here to make that 2019 contribution.

Andrew Busa:
Exactly. Yeah, that’s right. I should’ve said that. This is contributions for 2019. It’s a nice little bridge if you haven’t done that yet, nice extension there to get some more money into your retirement accounts.

Andrew Busa:
This has been a lot to take in. And there’s probably going to be more legislative action to come again because we’re still in the beginning of just seeing what the impact of this virus will be on the economy domestically and globally. We’ll continue to provide our insights, as well as just the intricacies and the impacts of these legislative measures as they become clear. If you have any questions regarding how this CARES Act may impact you or someone you know, please contact us, contact your portfolio executive. We’re here to help you.

Diana Linn:
Absolutely.

Andrew Busa:
Any other big takeaways for you, Diana?

Diana Linn:
Well, I agree with you. This is a lot to take in. We are in certainly unprecedented times. I think this might also be a wonderful time, if you have already gone through the financial planning process, this is a wonderful time to bring it up, take a peek, and see how the market volatility or these different provisions in the CARES Act are affecting you personally.

Diana Linn:
If you don’t have a financial plan, this is also a wonderful time to get started, a way to monitor your expenses and your income, laying that foundational work and seeing, getting, diving in to the weeds to see if there are any of these benefits the government is putting out that you can take advantage of.

Andrew Busa:
Yeah, I think that’s a great point just to talk about when we were talking about action items that you could potentially take. Say taking advantage of a low-income tax year, that’s going to become a lot clearer if you have a financial plan to see if it’s something that you can or should take advantage of. Because a lot of these decisions are really difficult to make without that broader context of where you are today and where your plan is headed over time. So, that’s a great point. I think this is just a great time to sit down with your financial planner or adviser and really just go through the exercise. If you’ve already done it one or two years ago, now’s the time to update it. When there’s a big event like this, this is a great time to just level-set and have the conversation again just to make sure that everything is updated.

Diana Linn:
Right. And like you said, we’re here for you. We are going to continue to stay up to date on all of the modifications that are made to this CARE Act or improvements, and we’re here. So, please ask us questions.

Andrew Busa:
Absolutely. Well, Diana, this has been a great conversation about a very difficult topic, but I’m glad that we took the time to do it. I think it’s really going to be worth hopefully the listening that you did here, if you did enjoy this conversation, please subscribe, review our show, and you can always check us out at adviserinvestments.com/podcasts. Your feedback is always welcome. If you have any questions or topics that you’d like us to explore, please email us at info@adviserinvestments.com. Thanks as always for listening.

Podcast released on April 15, 2020. This podcast is for informational purposes only. It is not intended as financial, legal, tax or insurance advice even though these topics may be discussed. Information and events addressed in this podcast, as well as the job titles, job functions and employment of the podcast’s participants with respect to Adviser Investments, LLC may have changed since this podcast was released. For more information on each individual featured in this podcast, see the Our People section of our website.

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We are in unprecedented times... [if you have a financial plan,] this is a wonderful time to bring it up, take a peek and understand how the market volatility or these different provisions will affect you personally.


Diana Linn, CFP®

Financial Planner

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