Could the CARES act end up costing investors and retirees?

Early 2020 will likely go down in history as a time of worldwide illness, panic, and in some cases, financial devastation. It took just over a month for the Dow Jones Industrial Average to fall from its high of over 29,500 to 18,213, primarily driven by the economic impact of the corona virus COVID-19 pandemic. This, in turn, led to the enacting of a government stimulus package, as well as the CARES Act legislation to help provide consumers with at least some form of financial relief. But while these “solutions” might sound initially sound enticing, they could actually be much more beneficial to Uncle Sam.

The Coronavirus Aid, Relief and Economic Security Act – more commonly referred to as the CARES Act – was signed into law by President Donald Trump on March 27, 2020, for the purpose of stimulating the U.S. economy, and to provide relief for both individuals and businesses that have been negatively impacted by the coronavirus crisis.

But, while this legislation may at first glance appear to be well intentioned, a closer look could indicate an entirely different story. Which brings to mind an important question: Will the CARES Act actually help or hinder investors and retirees going forward?

What type of financial incentives are offered by the CARES Act?

There are several key components of the CARES Act that are aimed at both consumers and businesses. The consumer-related highlights of this legislation include:

• One-time direct payments for eligible consumers. Qualifying Americans who pay taxes may receive a payment of up to $1,200 for single individuals, and up to $2,400 for married couples, with an additional $500 per child.
• Unemployment income benefits. Unemployment benefits have been expanded to include freelancers and other independent contractors who are typically not eligible. Qualifying workers may receive an additional $600 per week (on top of their weekly unemployment income) for four months. And, eligible individuals may be able to receive benefits through the end of 2020.
• Coronavirus testing at no cost. Insurance companies will require no out-of-pocket payment for insureds when obtaining testing for the Coronavirus.
• Increased 401(k) plan loans. The limit on 401(k) loans has been doubled from $50,000 to $100,000.
• Penalty-free use of retirement funds. The CARES Act waives the 10% “early withdrawal” penalty that IRA and retirement plan investors typically incur if funds are accessed before turning age 59 ½. (Note that taxes will still be due on the amount of the withdrawal that is considered gain).
• Enhanced charitable deductions. The CARES Act has revised the limits on charitable contributions, as well as allowed an above-the-line deduction for such donations.
• Interest Expense Limitation. The interest expense limitations, which were 30% for tax years 2019 and 2020, have now been increased to 50%.
• Temporary suspension of Required Minimum Distributions. While the SECURE Act, which took effect on January 1, 2020, increased traditional IRA and retirement plan required minimum distributions (RMDs) from age 70 ½ to age 72, the CARES Act has now temporarily suspended these required withdrawals altogether. (A similar provision was enacted in late 2008. Via the Worker, Retiree, and Employer Recovery Act, waiving RMDs allowed eligible account holders and beneficiaries receiving distributions to skip required withdrawals for that year). This can allow your tax-deferred savings to continue growing, and could even provide a larger base by which to generate retirement income in the future (depending on how the portfolio performs going forward).

Will the deferral of taxes and withdrawals end up taking more money out of your pocket?

While the CARES Act may at first appear to provide some much-needed financial relief for investors, there are some provisions of this legislation that require a second look, as they may or may not necessarily be in the best interest of individual investors. In fact, in some cases, Uncle Sam may actually reap more of the benefit.

Take, for instance, the temporary suspension of required minimum deductions (RMDs) from traditional IRAs and retirement plans. While keeping money in a traditional IRA and/or retirement account can certainly allow it to continue growing, you will still owe tax when you eventually take your withdrawal(s) – and if there is more money in the account, you could end up handing over a larger amount of tax to Uncle Sam.

2020 INCOME TAX RATES

Tax Rate	Taxable Income for Unmarried	Taxable Income for Married Filing Jointly	Taxable Income for Head of Household
Tax Rate10%	Taxable Income for Unmarried$0 - $9,875	Taxable Income for Married Filing Jointly$0 - $19,750	Taxable Income for Head of Household$0 - $14,100
Tax Rate12%	Taxable Income for Unmarried$9,876 - $40,125	Taxable Income for Married Filing Jointly$19,751 - $80,250	Taxable Income for Head of Household$14,101 - $53,700
Tax Rate22%	Taxable Income for Unmarried$40,126 - $85,525	Taxable Income for Married Filing Jointly$80,251 - $171,050	Taxable Income for Head of Household$53,701 - $85,500
Tax Rate24%	Taxable Income for Unmarried$85,526 - $163,300	Taxable Income for Married Filing Jointly$171,051 - $326,600	Taxable Income for Head of Household$85,501 - $163,300
Tax Rate32%	Taxable Income for Unmarried$163,301 - $207,350	Taxable Income for Married Filing Jointly$326,601 - $414,700	Taxable Income for Head of Household$163,301 - $207,350
Tax Rate35%	Taxable Income for Unmarried$207,351 - $518,400	Taxable Income for Married Filing Jointly$414,701 - $622,050	Taxable Income for Head of Household$207,351 - $518,400
Tax Rate37%	Taxable Income for Unmarried$518,401+	Taxable Income for Married Filing Jointly$622,051+	Taxable Income for Head of Household$518,401+

More money in the account can also lead to a larger dollar amount of the required minimum distribution – which in turn, can also end up costing you more in taxes. Given that, it is important to keep in mind that deferring taxes does not mean that taxes won’t ever be due, but rather that they are just simply being delayed. And, depending on when the time for taxation comes, it is possible that you could be in a higher tax bracket, too.

Want to know more about how you can keep your retirement savings on track?

Many retirees and investors have seen vast changes in their portfolios due to the coronavirus outbreak – and for those who are invested in equities, the volatility of the stock market has likely led to a reduced value, as well as the need to make some revisions in your plan going forward.

Because such changes can oftentimes be complex, it is essential to consider how various moves could impact your overall planning strategies. This includes your tax liability. Working with a retirement income specialist can help to get – and keep – you on track with your current and future financial goals.

Alliance America can help

Alliance America is an insurance and financial services company. Our financial planners and retirement income certified professionals can assist you in maximizing your retirement resources and help you to achieve your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.