CARES Act 2020 on Retirement: What You Need to Know to Qualify

Congress has passed historic legislation that provides protections and funding for a number of initiatives aimed at reducing the impact of COVID-19 on the American economy. The CARES Act provides assistance to workers and a variety of businesses that are affected by the outbreak. However, if you’re in or near retirement, there are important effects on retirement planning and finances.

The bipartisan relief package totals 2 trillion dollars in funding with the hope of providing immediate relief to many Americans. The package includes relief for individuals, small businesses, and large corporations. It extends and expands unemployment benefits offered by state governments and provides much-needed support for hospital systems as well as state and local governments.

The necessity of this legislation was created as a result of a dramatic slowing of economic activity. This is due to a drop in consumer spending, growing unemployment, and the mandatory closing of businesses across the country. There are provisions in the law that will have an effect on almost all Americans, especially retirees. Learn how you can qualify for the benefits defined under the CARES Act.

Direct Payments to Taxpayers Based on Income

The bill provides direct payments to individuals and families. Individuals will receive a one-time payment of $1,200 and married couples are set to receive $2,400. In addition, families see an additional $500 per child under the age of 17.

Please note that there is an income limit that determines who will receive checks. Individuals with an adjusted gross income of less than $75,000 will qualify for the payment. If an individual makes more than $75,000, but under $99,000, they will see a reduced payment. Individuals making more than $99,000 will not qualify for the payment.

Similarly, these thresholds are doubled for married couples with a combined income of $150,000. If couples make between $150,000 to $198,000, they will see a reduced payment. Couples making above $198,000 in adjusted gross income will not qualify. 

How Is Income Defined?

Income, for purposes of this payment, will be based on your adjusted gross income listed on your most recent tax return. If you’ve filed for your 2019 taxes already, the income will be based on your 2019 filing. However, if you have not filed your 2019 taxes, it will be based on your 2018 filing. To find this information on your 1040, look to line 7 on your 2018 return or 7b on your 2019 return.   

2020 Required Minimum Distributions Suspended

Required Minimum Distributions (RMDs) from qualified plans and IRAs have been suspended for 2020 and are set to resume in 2021. If you have not taken your RMDs for 2019 and planned to, that distribution is also no longer required. This Act also applies to individuals required to take a distribution from inherited IRAs.

Access Money in Retirement Accounts Penalty-Free

If you are younger than age 59.5, the CARES Act allows you to make a penalty-free withdrawal up to $100,000 from a retirement account as long as you meet these conditions:

• You or your spouse is diagnosed with the disease OR
• You have experienced financial hardship as the result of unemployment, furlough, reduced work hours, or unable to work due to unavailable child care resources.

Typically, if you withdraw money prior to 59.5, you are subject to a 10% penalty on the amount withdrawn. Although the CARES Act waives this penalty, withdrawals are still subject to income tax. To lessen the hardship, the tax due on the withdrawal is allowed to spread over three years beginning in 2020. You can also avoid the income tax altogether by paying back any amount withdrawn within the three-year period.

2019 Tax Filing Deadline Extended

Outside of the CARES Act, the IRS extended the 2019 filing deadline from April 15, 2020, to July 15, 2020. This means you have until July 15, 2020, to make IRA contributions for 2019.

Charitable Contributions Limits Increase

Prior to the legislation, in order to get a deduction for charitable contributions you needed to itemize your deductions on your return. The new law has added the ability to deduct up to $300 in donations to a qualified charity even if you use the standard deduction.

For those with itemized deductions, the law removes the limit set at 60% of adjusted gross income. Therefore, charitable contributions are now deducted up to 100% of adjusted gross income. 

Also, this legislation applies to businesses. Before the CARES Act, businesses could only deduct up to 10%. Now, they are able to deduct their charitable contributions up to 25% of income.

Relief for Small Business Owners

Since many retirees are also small business owners, there are special provisions created by the CARES Act. The bill defines a small business with less than 500 employees and also includes sole proprietors and non-profits.

The CARES Act provides $350 billion in loans. The loans are intended to cover payroll expenses, as well as certain business overhead costs like rent or utilities. The loans have a maximum interest rate of 4% and can be paid over 10 years. In certain cases, these loans can be forgiven if the business successfully maintains its workforce. In order to seek forgiveness of the loan, the borrower must complete an application and include documentation on how the money was used.

The federal government, through the Small Business Administration (SBA), is expanding access to Disaster Loans and Grants for businesses that need capital beyond payroll expenses. The grants are in the amount of $10,000 and do not need to be repaid. Loan amounts below $200,000 will not require a personal guarantee from the business owner. These loans will be administered by the Small Business Administration in partnership with banks and other lenders. You can learn more about these programs by visiting SBA.gov.

What happens next?

It is unclear if these provisions will do enough to stabilize markets and the economy. They are certainly unprecedented in size and scope. Lawmakers have indicated that more action may be needed going forward to help the economy. At this time, it’s important to take advantage of the CARES Act if you qualify.