LLG Blog

Monday, September 20, 2021



Recent tax law changes may affect your estate plan

The Coronavirus Aid, Relief and Economic Security (CARES) Act is designed to provide immediate tax relief to individuals and businesses struggling to make ends meet due to the novel coronavirus (COVIOD-19) pandemic. But this law may also have a long-reaching impact on your estate plan. Notably, the CARES Act includes several provisions for participants in qualified retirement plans and IRA that could span generations.

Required minimum distributions

Most individuals are familiar with the basic rules for required minimum distributions (RMDs). Generally, you must begin taking RMDs from qualified plans and traditional IRAs after attaining a specified age. Failing to do so results in a tax penalty equal to 50% of the amount that should haven been withdrawn, besides the regular income tax.

Typically, account owners want to minimize RMDs so they can preserve more wealth for their heirs. But the Setting Every Community Up for Retirement Enhancement (SECURE) Act essentially eliminated the use of “stretch IRAs” where RMDs from plans or IRAs could be stretched over the long life expectancies of nonspousal beneficiaries. Beginning in 2020, the account must be emptied within 10 years of the owner’s death.

Previously, the required beginning date for RMDs was April 1 of the year following the year in which you turned age 70½. However, the SECURE Act postponed the required beginning date from age 70½ to 72, effective in 2020. This allows account owners to accumulate more wealth through tax-deferred compounding.

The CARES Act adds even more protection. It suspends all RMDs for 2020 — even those for inherited accounts — without penalty. In other words, you don’t have to take the usual RMDs, keeping your account intact. If you’ve already taken RMDs for the 2020 tax year, you have several options at your disposal (see the sidebar “Available options for early RMDs” on page X).

COVID-19 distributions

The CARES Act carves out special tax breaks for qualified plan and IRAs participants who are affected by the COVID-19 pandemic. As with the rules for RMDs, you have more flexibility in managing retirement assets.

For starters, you can avoid a tax whammy if you withdraw funds from a qualified plan or IRA prematurely. Generally, you owe a 10% penalty tax — plus regular income tax — for distributions made before age 59½. But the tax code includes certain exceptions to this general rule (such as for distributions made on account of disability). Now the Cares Act adds to the list.

Specifically, the new law creates an exception for distributions of up to $100,000 for an individual (or spouse) who is diagnosed with COVID-19 or has experienced adverse financial consequences due to the virus, such as being quarantined, being furloughed or laid off, having hours reduced or losing child care.

Furthermore, although COVID-19 distributions remain taxable, you can choose to pay off the resulting tax liability ratably over three years. Alternatively, you may avoid tax completely by “rolling over” the funds to a qualified plan or IRA within the three-year period (see the sidebar “Available options for early RMDs” on page X). Be aware that the standard time period for a rollover is 60 days from the date of the distribution.

Retirement plan loans

If your 401(k) plan or profit-sharing plan permits it, you can borrow from your account, within certain limits, in times of need. Currently, the loan can’t exceed the lesser of $50,000 or 50% of your vested account balance. For instance, if you have $500,000 in the account, you can only borrow up to $50,000.

Again, the CARES Act provides plan participants with extra flexibility. For hardship loans made between March 27, 2020 and September 23, 2020, you can borrow up to the lesser of $100,000 and 100% of your vested balance.

This gives plan participants considerably more wiggle room. Going back to our example where you have $500,0000 in an account, you can now borrow $100,000—twice as much as before.

In addition, the CARES Act extends the due date for loan repayments due in 2020 by one year. Generally, loans must be repaid within five years. In effect, this extends the repayment period to six years.

Finally, the new law permits retirement plans to adopt these provisions immediately even if loans aren’t currently allowed. Note that the plan must be amended by 2022.

Time to review your estate plan

It’s always sage advice to review your estate plan from time to time, but especially after a new tax law, such as the CARES Act, is passed. Meet with your estate planning advisor to determine if any of your strategies need to be revised.


SIDEBAR: Available options for early RMDs

The Coronavirus Aid, Relief and Economic Security (CARES) Act allows you to skip RMDs in 2020. But what if you took RMDs earlier in the year?

If an RMD qualifies as a COVID-19 distribution, you can roll over the funds into another plan or IRA within three years. This gives you plenty of time to maneuver.

Finally, you might decide to convert traditional IRA funds into a Roth IRA. Although the conversion is currently taxable, you can benefit from tax-free payments in the future.

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