Making Your Money Last

Why Retirees Should Care about the CARES Act: How to Maximize Coronavirus Stimulus Package

The government's $2 trillion stimulus bill has something for pretty much everyone. Here's how retirees are affected and some steps to consider to make the most of this measure.

Less than a month ago, on March 12, I taught a class to 40 retirees in our offices on the planning strategies surrounding the SECURE Act. That scene is now unimaginable. One client in that group left the next morning for Disney World with his kids and grandkids. Our clients have gone from navigating the “death of the stretch IRA” to trying to circumvent actual death in the age of COVID-19. It’s eerie and surreal — and it’s safe to say the SECURE Act has taken a back seat to more pressing issues.

Our nation has mounted a massive response to the coronavirus pandemic focusing on health, safety and the economy. From a monetary standpoint, the Fed was first to act, with an emergency rate cut on March 3 followed by additional cuts that brought the Federal Funds Rate to zero.

On March 27, 2020, the market got what it was looking for on the fiscal front. The Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act) is the biggest economic stimulus package ever signed into law. It impacts health care systems, small businesses, workers and retirees. This article will help retirees navigate the impact on them and the planning strategies developing as a result of the legislation.

1. Yes, you will (likely) get a check (direct deposit)

This is wholly dependent on your 2018 OR your 2019 adjusted gross income and the number of kids you have under 17. Section 2201 of the act details this, and it is much more confusing than most of the literature suggests, because it is technically a 2020 tax credit that is being credited to you in advance. This matters only if you did not qualify in 2018 or 2019 because your income was too high, but you lose your job in 2020 and therefore do qualify. You’ll get your check, but not until you file your 2020 taxes, in 2021.

Here are the numbers that matter:

  • Individuals: AGI < $75,000 = full $1,200 stimulus check
  • Head of Household: AGI < $112,500 = full $1,200 check
  • Married Filing Jointly: AGI < $150,000 = full $2,400 check

Beyond these thresholds, you lose $5 of credit per $100 of income. To simplify, assuming there are no kids under 17, individuals will see a reduction in credit all the way up to $99,000, at which point it will completely disappear. Married couples will see the same reduction up to $198,000 before it goes away.

Planning strategy: If you qualified in 2018 but not in 2019, wait until July to file your 2019 taxes. If you qualify in 2019 but did not in 2018, do the opposite. File your taxes ASAP. The checks, termed “recovery rebates,” will likely show up in May (though, this is ever-evolving). For those receiving Social Security, the checks will be direct-deposited into that same account. For those who are set up for direct deposit of their tax refund, same thing.

2. You can skip your 2020 RMDs for both your accounts and beneficiary accounts

RMDs are loathed by those retirees who don’t need the income. The distribution creates a taxable event for money that is often rolled right back into a taxable investment account. Good news: RMDs have been suspended for calendar year 2020 for retirement accounts and inherited retirement accounts.

If you have already taken your 2020 RMD for your own account, you have 60 days to indirectly roll it back into that account. You simply write a check and deposit it back into the same account. If you’ve already taken a distribution from an inherited account, there is no way to get that money back in.

Planning strategy: If you don’t need the RMD, don’t take it. Keep your income artificially low in 2020 and use the opportunity to make a Roth IRA conversion. Convert up to the top of the tax bracket without jumping into the next one. Example: You’re married, filing jointly and your taxable income is $180,000, including your $30,000 RMD. Your marginal tax rate is 24%. Skip the RMD, bring your taxable income down to $150,000 and convert $21,000 from your traditional IRA to your Roth IRA, all while staying in the 22% marginal bracket.

3. Coronavirus-related distributions

If the coronavirus crisis hurts you financially, you can pull out up to $100,000 from your retirement account(s) and spread the tax hit over three years. I view this as more of a windfall for those under 59½ than for those who are older, because it also waives the 10% early-distribution penalty.

I think we will see some creative strategies from folks in real estate looking for more liquidity, but the benefits are limited for those who already have access to that money, penalty-free.

Planning strategy: If you took your RMD at the very beginning of the year, you got lucky because you sold at the top. This is typically not a good practice. That said, you may be beyond the 60-day window to get the money back in. This is all developing but, based on the ability to pay back coronavirus-related distributions over three years, you can probably get that money back in, within three years of your distribution date.

4. There are benefits for Medicare beneficiaries

A couple of my extended family members have Parkinson’s disease, so they rely on a plethora of prescription drugs. As soon as drug supply chains started getting thrown off in China, it would have been wise for any of these family members to stock up on their drugs. One of the provisions of the CARES Act requires pharmacies to accept and fill 90-day drug supplies for Medicare Part D beneficiaries.

While it seems a long way off, Medicare beneficiaries will also be able to get the COVID-19 vaccine at no cost. Lastly, you can now tap health savings accounts for a wider range of products, coined “over-the-counter medications.”

Planning strategy: Order your drugs online. It’s safer. Stay inside.

5. There are incentives to make charitable contributions

The wealthy have long been able to “game” the charitable rules. Some of the new provisions in the CARES Act open that door a little wider. For 2020, the AGI limit on charitable giving, previously 60%, has been raised to 100%. This means that if you want to give a big gift in 2020, you can effectively bring your taxable income to zero.

There is a new above-the-line deduction for cash contributions up to $300. While this is not a big figure, it allows a tax benefit for those who don’t itemize, which according to the Tax Foundation is over 90% of filers. Important exception: If you do itemize, you cannot take this deduction. Your charitable deductions will be reflected on your schedule A.

Planning strategy: If you don’t itemize and are over 70½, give your first $300 from taxable positions: bank, brokerage account, etc. Beyond that, give from your IRA via a qualified charitable distribution (QCD).

If you plan to make large charitable gifts, 2020 is a good year to do it. Use the gift(s) to lower your capital gains rate to zero and sell something with an unrealized gain.

We are now playing life on a new chessboard. Certain elements will never return to “normal.” Will kids ever have another snow day, or will these now just be “virtual days”? Many of the independent businesses you love will cease to exist after the economic blow this pandemic has dealt them. As a retiree, the nest egg you have is your business. I hope this column helps you fortify that business.

About the Author

Evan T. Beach, CFP®, AWMA®

Wealth Manager, Campbell Wealth Management

Evan Beach is a Certified Financial Planner™ professional and an Accredited Wealth Management Adviser. His knowledge is concentrated on the issues that arise in retirement and how to plan for them. Beach teaches retirement planning courses at several local universities and continuing education courses to CPAs. He has been quoted in and published by Yahoo Finance, CNBC, Credit.com, Fox Business, Bloomberg, and U.S. News and World Report, among others.

Most Popular

8 Money Tips for Seniors Suffering from Inflation
Inflation

8 Money Tips for Seniors Suffering from Inflation

This year has been an especially tough one for seniors on fixed incomes. To stay on track, try these eight financial survival tips.
June 26, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
An Easy Way to Find How Much You Will Spend in Retirement
retirement planning

An Easy Way to Find How Much You Will Spend in Retirement

One simple math equation can help you determine where to start building your retirement income plan, and whether your money should last.
June 27, 2022

Recommended

Taxes on Unemployment Benefits: A State-by-State Guide
state tax

Taxes on Unemployment Benefits: A State-by-State Guide

Don't be surprised by an unexpected state tax bill on your unemployment benefits. Know where unemployment compensation is taxable and where it isn't.
June 23, 2022
33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
June 23, 2022
Best Banks for Higher-Net-Worth Clients
wealth management

Best Banks for Higher-Net-Worth Clients

Those who can meet high minimum-balance requirements at these banks get abundant account freebies and extras ranging from financial advice to event ac…
June 23, 2022
The Best Bank for You, 2022
Making Your Money Last

The Best Bank for You, 2022

Check out our list of the best candidates for your next financial institution based on interest rates, fees and other features.
June 23, 2022