On March 27, the historic Coronavirus Aid, Relief, and Economic Security Act (CARES Act) became law, providing an estimated $2-trillion in emergency economic relief and stimulus for Americans and U.S. businesses. This Act contains numerous tax provisions that will likely dominate the advice that financial advisors give to clients in the months ahead. Below is an overview of the key CARES Act tax provisions that financial advisors and wealth managers need to know.

Retirement Plan And IRA Adjustments

Required Minimum Distributions: The 10% early distribution penalty, when applicable in light of the pre-existing IRS Tax Code (Tax Code) exclusions from such penalty, is temporarily waived for distributions paid from retirement plans (Plan) and IRAs where up to $100,000 is withdrawn for reasons related to COVID-19.

The federal income tax payable with respect to such Plan or IRA distributions may be paid to the U.S. Treasury in three or fewer years. In addition, these amounts may be paid back to the Plan or IRA over three years or less, without changing the participant’s annual plan contribution limits in each year.

The RMD amount is waived. This allows amounts otherwise required to be paid to participants to remain in the plan and not be taxed as income, and protects plan assets from being sold at depressed values.

Plan Loans: Plan loans may exceed existing limits when obtained in 2020 for reasons related to COVID-19. Plan sponsors may allow participant loans of up to a maximum amount of $100,000 or 100% of the participant’s account balance (increased from the lower of $50,000 or 50% of the account balance). Loan repayment starting dates may also be delayed for the participant in the Plan.

Contributions: Due dates for IRA contributions and employer contributions to retirement plans for 2019 are extended until July 15, 2020. HSA Plan contributions for 2019 are also extended.

Qualifications: A COVID-19-related plan or IRA payment to an individual exist when:

1. the taxpayer, their spouse or a dependent is diagnosed with COVID-19; or

2. the taxpayer suffers adverse economic effects due to quarantine, furlough, lay off, reduced work hours, closing, or reductions in their business due to COVID-19, where such business is operated by the taxpayer.

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