What the CARES Act Means for Your Financial Health

By now, you have likely heard of the Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act). This legislation dispersed $2 trillion in financial assistance across the American economy.

The CARES Act provided an estimated $560 billion in direct support to individual Americans affected by the coronavirus pandemic. Here are three key provisions for individuals in this new legislation—plus, a few planning tips to help advance your financial health, as well:

Recovery rebates

In the coming weeks, 125 million Americans—about 83% of tax filers—will receive recovery rebates (cash payments). Individuals who do not file a joint return and have income up to $75,000 will each receive a recovery rebate of $1,200. An additional $500 will be provided for each qualifying child, as well. Couples who file a joint return and have income up to $150,000 will receive a recovery rebate of $2,400. So, for example, Henry and Gayle, who have two children and have a combined income of $140,000, can expect a recovery rebate of $3,400.

For tax filers whose income exceeds the above limits, their recovery rebates will be reduced by $5 for each $100 of their income and fully phased out at $99,000 for individuals and $198,000 for couples. Here’s a handy calculator you can use to estimate your own recovery rebate. Using this additional link, you can also check on the status of your recovery rebate.

Practically speaking, the recovery rebate is like other refundable tax credits, such as the child tax credit and earned income tax credit, and is not considered income.

Planning tip: It’s easy to categorize different sources of income into separate, imaginary spending budgets. For example, work pay may be designated to pay the bills, while extra money, like a $2,400 tax refund, may be thought of as “fun money” to pay for a weekend excursion (yes, such a thing will exist again in the not-too-distant future) or even V-bucks for the grandchildren (If necessary, ask a 10 year-old about this currency).

This tendency is called mental accounting and can sometimes lead to poor spending decisions. Instead, stretch your imagination about any recovery rebate you may receive in the next few days: Do you need the full cash payment to pay the bills? If not, how could some of the funds be used to build an emergency fund or save a bit more for retirement?

Qualified access to retirement savings

For employees who participate in a workplace retirement plan, such as a 401(k) or 403(b), that offers plan loans, the CARES Act raised the loan limit to the lesser of 100% of the account balance or $100,000. Hardship withdrawals, also known as the coronavirus related distributions (CRDs), up to $100,000 from workplace retirement plans and IRAs are also available to individuals with qualifying needs.

Planning Tip: While a coronavirus-related hardship distribution is not subject to the 10% penalty, it is subject to income taxes. If you need to take a hardship distribution from your retirement account, ask a qualified accountant how you can both report the income over three years to potentially minimize the tax hit, as well as how you can repay the distribution to your retirement account during the same time period.

Required minimum distributions

For individuals who were age 70 ½ by the end of 2019, typically an RMD (Required Minimum Distribution) would be due this year; however, the CARES Act suspended the 50% tax penalty on any RMD amounts that are not distributed in 2020. As such, the CARES Act allowed for RMDs to be pushed off until next year.

As an aside, for individuals who were not age 70 ½ by the end of 2019, another piece of legislation called the SECURE (Setting Every Community Up for Retirement Enhancement) Act changed the RMD age from 70 ½ to 72.

Planning Tip: If you were age 70 ½ by the end of 2019, this relief opportunity is especially helpful if you do not need the full amount of the RMD this year. The RMD figure was based on your ending balance in your retirement account as of December 31, 2019—a point in time when the stock market was a bit more generous and cooperative. Ask a qualified accountant and your retirement plan provider about the ability to delay your RMD until 2021. (Incidentally, the CARES Act also allows non-spousal beneficiaries of inherited retirement accounts to push off their RMDS until next year.)

There are other provisions in the CARES Act that may have an impact on your overall financial health, so reach out to a CFP® professional in your area today to discuss your specific planning objectives and interests.