CARES Act: Planning opportunities for individuals and families

CARES Act: Planning opportunities for individuals and families

Few events in the history of the United States have impacted the economy as drastically and suddenly as the COVID-19 pandemic. In response, the federal government has taken unprecedented steps to counter and reverse the negative impacts.

While much attention has been paid to the corporate relief measures and personal stimulus checks, the Coronavirus Aid, Relief, and Economic Security (CARES) Act also includes a variety of provisions impacting retirement planning, charitable giving and estate planning for individuals and families.

Highlights include:

One-year suspension of required minimum distributions (RMDs)

In 2020, RMDs are suspended for defined contribution plans (such as 401(k) and 403(b) plans) and all types of IRAs. This includes RMDs for 2019 which could have otherwise been taken by April 1, 2020.

Waiver of the 10% early withdrawal penalty

In 2020, coronavirus-related withdrawals of up to $100,000 may be taken, penalty-free from qualified retirement plans and all types of IRAs. Income taxes, where applicable, still apply to the distribution.

To qualify the account owner must have:

  • Been diagnosed, or had a spouse or dependent diagnosed with COVID-19;
  • Suffered adverse financial consequences as a result of being quarantined;
  • Been laid off or had reduced work hours based on government or private reactions to COVID-19;
  • Been unable to work due to lack of child care due to COVID-19; or
  • Satisfied any other factors determined by the Treasury Department.

A retirement plan administrator may rely on an employee’s certification that a withdrawal satisfies at least one of the conditions listed above.

The distribution may be taxed either in the year of distribution or ratably over a three year period. Also, the taxpayer has the option of paying back the plan for the distributed amount at any point during the three year period.

Increased plan loan limits

For 180 days, limitations on loans from qualified employer plans (such as a 401(k) plan) are doubled from $50,000 to $100,000, and eligible loan repayments may be delayed for up to a year. Any possible loan relief under the CARES Act is subject to the terms of the relevant retirement plan.

Charitable giving gets a boost

In 2020, those taking the standard deduction may be entitled to a $300 above the line charitable contribution deduction. Taxpayers who itemize may deduct cash gifts of up to 100% of adjusted gross income. This is a significant increase from the previous limit of 50-60%.

Planning opportunities

You don’t have to sell low

With many retirement accounts suffering significant market losses, the suspension of RMDs is a welcome break, especially for account owners who are already in the RMD phase, or who will turn age 72 in 2020. The suspension creates a distribution-free year allowing retirement account values to (hopefully) bounce back. In the meantime, if available, life insurance cash values can serve as a rainy day fund to the  policyholder.*

Roth conversions

With IRA values depressed, "discounted" Roth conversions can be a silver lining. It’s all about income taxes – now and in retirement. Income taxes are due on the taxable amount converted to a Roth IRA; therefore it is generally best to convert when account values are down.

After conversion, the Roth IRA has recovery time without lifetime RMDs. Roth IRAs provide income tax-free, qualified distributions. Roth conversions are available to all IRA owners, regardless of income level.

Charitable giving with life insurance

Increasing the charitable deduction for cash gifts up to 100% of adjusted gross income creates a one-year window for wealthy individuals who itemize deductions to maximize charitable gifts.

For charitable donors who are insurable and can document a history of significant charitable giving, the purchase of life insurance on the donor’s life may be appropriate. The life insurance policy would be owned by and payable to the charity. The charity would also have access to any life insurance cash value.

Tax-free wealth transfer opportunities

In 2020, the estate and gift tax-free transfer amount is $11.58 million per person. This unprecedented opportunity to pass large amounts of wealth free from transfer taxes is scheduled to revert to a much lower amount in 2026.

With some assets experiencing a sharp decline in value (hopefully temporarily), it may be an appropriate time to transfer assets to a trust, using a smaller amount of the estate and gift exclusion to do so. As the assets recover in value, the recovered values may avoid estate and gift taxes. Where appropriate, to maximize wealth for heirs, a portion of the trust-owned assets (or income from the assets) may be used to fund life insurance policy premiums. If the trust is properly drafted, funded and administered, the death benefit will avoid estate, gift and income taxes.

The CARES Act and planning

Life insurance is an important wealth protection and estate planning tool for many individuals and  families. Where appropriate, it should continue to be budgeted into financial and estate plans.

The CARES Act is a sweeping piece of legislation. It impacts financial and estate plans for many individuals and families. It is important to work with financial, tax and legal professionals to help examine individual circumstances and see whether the planning opportunities described here are appropriate.

*Policy loans, if taken, reduce the death benefit. If policy loan interest is not paid and the policy terminates, a taxable event may occur. Loans and withdrawals from life insurance policies that are classified as modified endowment contracts may be subject to tax and, if taken prior to age 59½, a 10% federal tax penalty may apply.

This provides general information that should not be construed as specific legal or tax advice nor the law of any particular state.  Please seek the advice of a qualified legal or tax professional for your specific situation.

Insurance products issued by The Ohio National Life Insurance Company and Ohio National Life Assurance Corporation. Guarantees are based upon the claims-paying ability of the issuer. Product, product features and rider availability vary by state. Issuers not licensed to conduct business in NY. 

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