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Retirement Accounts and the CARES Act

Retirement Accounts and the CARES Act | Financial Planning

Retirement accounts provide investors tax benefits but have strings attached.  The tax code imposes penalties for withdrawing from these accounts too soon. It is also possible to be penalized for not withdrawing quickly enough.  

The CARES Act contains a number of stimulus measures benefits to prevent the economy from entering a COVID-19 induced deflationary spiral.  It also temporarily gives investors and retirees more freedom to decide how much, if any, they would like to withdraw from retirement accounts.  These temporary freedoms, if exercised responsibly, may help you manage your cashflow this year.

Each year, many retirees and owners of beneficiary IRAs are required to take distributions from their accounts, even if they do not need the money for their current expenses.  The CARES Act waives required minimum distributions for 2020.  

Some retirees are able to fund their living expenses with other sources of funds such as Social Security, a pension, reverse mortgage, or an after-tax brokerage account.  For them, simply skipping or reducing their distribution may seem appealing.  They could continue to defer the income tax and wait for their account values to recover.

This also creates an opportunity to use another strategy: a Roth conversion.  

When a retiree does a Roth conversion, they move assets from a tax deferred account to a Roth IRA.  This increases the retiree’s income tax for the year of the conversion, but the future growth of the assets becomes income tax-free.

For those whose living expenses are less than their projected future required minimum distributions, a Roth conversion could allow them to maintain a smoother taxable income profile over time.  This is valuable because progressive tax rates penalize those who have more income in one year and less in another.  

In addition, Roth conversions can help reduce risk.  For tax deferred accounts, it is uncertain what the future tax rate will be that will be applied to the distribution.  It is possible that the state governments and/or the federal government will raise income taxes in future years to help offset the cost of the many expensive stimulus programs.  By doing a Roth conversion now, investors can reduce their exposure to future tax increases. 

As financial advisors, we are well-equipped to assist you with estimating your future required minimum distributions and cashflow needs.  Please contact us today if you would like assistance planning for your financial future.



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