Morgan Stanley
  • Wealth Management
  • Jun 17, 2020

How the Coronavirus Stimulus Package May Help You

The U.S. government’s roughly $2 trillion coronavirus relief package may provide valuable aid if you’re retired, still in the workforce but need to tap your retirement savings now, or looking to help others in crisis. Here’s how.

The U.S. government’s roughly $2 trillion economic rescue package aims to spread relief broadly across the economy amid the coronavirus pandemic, delivering aid to overburdened healthcare providers, struggling small businesses and growing ranks of unemployed workers. 

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One part of the package receiving wide attention is a stimulus payment, available to taxpayers up to certain income thresholds.1 But the new law also includes other provisions meant to help retirees, or those still in the workforce who may need to tap their retirement savings now to get through rough times, and those looking to help others in crisis. 

Here’s how the Coronavirus Aid, Relief, and Economic Security (CARES) Act may help you if you’re …

… Retired

If you’re a retiree who keeps an eye on the markets, you’re likely reeling from the recent market retrenchment and continuing volatility. The CARES Act may help you hold onto your savings this year and ride out the turbulence by waiving 2020’s required minimum distributions (RMDs) for defined contribution qualified retirement plans, such as 401(k)s, and individual retirement accounts (IRAs).

Normally, if you turned 70 ½ before this year, you’d have to draw down a percentage of these accounts in 2020 and pay taxes on that income—or face significant penalties. The CARES Act’s RMD waiver helps you avoid locking in steep losses when selling securities in a bear market to meet the mandated withdrawal from your accounts. 

Note that if you already took an RMD in 2020, you may be able to perform a rollover into the same or another IRA or eligible retirement plan within 60 days of the distribution and avoid having it taxed as income. That’s provided that with respect to rollovers from one IRA to another, you have not already performed another 60-day rollover of an IRA distribution you received in the past 12 months.  The IRS issued guidance in April 2020, which, among other things, extends the 60-day deadline to rollover an otherwise eligible rollover amount to July 15, 2020, but only if the 60-day rollover period ends on or after April 1, 2020, and before July 15, 2020. This means that if you received a distribution of an otherwise eligible rollover amount from an IRA or eligible retirement plan on or after February 1, 2020, and your 60-day rollover period ends before July 15, 2020, your deadline to rollover such distribution is extended to July 15, 2020.

Also, note that even though RMDs for inherited IRAs have also been waived for 2020, if you hold an inherited IRA as a beneficiary of a deceased IRA owner, the law does not allow you to perform a 60-day rollover, unless you are the surviving spouse of the original IRA owner. 

… Not Yet Retired

If you or a loved one is sick or experiencing financial difficulties due to COVID-19, know there are resources available to support you. The new stimulus package makes it easier for you to access your retirement savings on an emergency basis through:

  • Coronavirus-Related Distribution Relief: You may be able to withdraw up to $100,000 in the aggregate from your tax-qualified retirements plans and IRAs in 2020 if you or a qualified loved one is diagnosed with COVID-19 or if you suffer coronavirus-related economic losses, such as a layoff or a furlough. Under the new law, you can also spread payment of federal income taxes on such withdrawals over three years. Or you can redeposit the money within three years and it will generally be treated as a rollover for federal tax purposes; any such contributions back into the account within the three-year period will not be counted toward the IRS’s annual contribution limits. If you are taking such a distribution before age 59 ½, the CARES Act waives the 10% penalty tax on early withdrawals. (Still, proceed with caution and consider other options if you have them. Many financial professionals generally advise against early withdrawals, as you lose potential investment growth.)

  • 401(k) Employer Plan Loan Expansions: For those affected medically or financially by COVID-19, the CARES Act also temporarily increases the amount you can potentially borrow from a tax-qualified employer retirement plan up to certain amounts for loans taken in the 180 days following the law’s enactment on March 27, 2020. In addition, those affected participants may be able to delay plan loan repayments for one year if the repayments were otherwise due during the period from the date of enactment through the end of 2020. Note that plan sponsors can elect whether or not to offer these loan expansions, so be sure to consult your specific plan.

Separate from the CARES Act, retirement savers should note that the deadline to contribute to an IRA or a health savings account (HSA) for the 2019 tax year has been extended from April 15 to the new federal tax-filing and payment deadline of July 15, 2020. That means you could still add funds to these accounts, up to the IRS 2019 maximums of:

  • $6,000, plus $1,000 in catch-up contributions if you were 50 or older in 2019, for IRAs,

  • $3,500 for single coverage ($7,000 for family coverage) and another $1,000 in catch-up contributions if you were 55 or older in 2019, for HSAs.

Note, however, additional contribution limitations may apply, meaning the maximum amount you may be able to contribute to an IRA or HSA may be less than the IRS maximums stated above. You should speak to a qualified tax advisor for more information on the applicable contributions rules. 

If you can, saving more now could reduce your taxable income for 2020 tax-filing purposes and help you continue to build your nest egg. 

… Seeking to Help Others

From healthcare workers to first responders, many people are risking their safety and making great sacrifices to battle this pandemic. Those of us not on the front lines may still want to help however we can. If you are charitably inclined, the CARES Act makes it easier to give, using a:

  • New $300 deduction: If you take the standard deduction on your federal tax return, beginning in 2020, the CARES Act allows you to claim a new deduction in computing adjusted gross income, of up to $300 for charitable cash donations made to qualifying charitable organizations.2

  • Higher deduction limit: Normally, if you itemize deductions on your federal tax return, the amount of charitable cash contributions you can deduct is capped at 60% of adjusted gross income. The CARES Act temporarily raises the cap to 100% of adjusted gross income for cash donations made in 2020. That means if you itemize deductions and make charitable cash contributions to qualifying charitable organizations, you can potentially deduct more this year.2

Take Care of Yourself

Many of us are facing circumstances that might have seemed unimaginable just a few months ago. Knowing what resources are available can help you make more informed decisions about your financial life.

In this time of uncertainty, we’re here to help you see a way forward. Find out more about key CARES Act provisions in our special report. In addition to provisions on retirement accounts and charitable donations, the report includes timely information about expanded unemployment benefits for individuals as well as employee-retention tax credits and expanded loan eligibility for businesses.

Connect with your Morgan Stanley Financial Advisor, and your tax and legal advisors, to discuss how the CARES Act may impact your particular financial and tax situations.