Tax Tips: CARES Act provisions for investors

MEREDITH — For Edward Jones financial advisors, passage of the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, has been good news in an otherwise unsettling time.

"Obviously, our biggest concern is for the well-being of everyone in our community," Devon Sullivan said. "But beyond the physical worries caused by the coronavirus, there have been deep economic concerns, and the CARES Act is an important move toward addressing some of these."

Sullivan shared several provisions of the CARES Act may be of particular benefit to investors:

Direct payments - Individuals will receive a one-time payment of up to $1,200. The amount is reduced for incomes over $75,000 and eliminated at $99,000. Joint filers will receive up to $2,400, with the amount reduced for incomes over $150,000, and eliminated at $198,000 for joint filers with no children. Plus, taxpayers with children will receive an extra $500 for each dependent child under the age of 17.

"One possible idea for this money is to use it as part of an emergency fund," Sullvan says. "By putting it in a low-risk, liquid account, you'll have it available when you need it for any large, unexpected expenses during the next several months."

Expanded unemployment benefits - The CARE Act provides $250 billion for extended unemployment insurance, expands eligibility and provides workers with an additional $600 per week for four months, in addition to what state programs pay. Unemployment benefits will also be extended through Dec. 31 for eligible workers. And the provisions also cover the self-employed, independent contractors and "gig economy" workers.

"These benefits can provide a lifeline to many workers," Sullivan says. "And they may be able to help people avoid liquidating some long-term investments earmarked for retirement just to meet their daily cash flow needs."

No penalty on early withdrawals - Typically, individuals pay a 10 percent penalty on early withdrawals from IRAs, 401(k)s and similar retirement accounts. Under the CARES Act, this penalty will be waived for individuals who qualify for COVID-19 relief for distributions up to $100,000 in aggregate from IRAs and plans that allow COVID-19 distributions. Withdrawals will still be taxable, but the taxes can be spread over three years.

"Waiving the 10 percent penalty is a positive move during times like this," Sullivan says, "but we would still advise our clients that, if they really have a need for the money, to look at other sources first, because IRAs and 401(k)s are long-term vehicles designed to help support people during their retirement years."

Suspension of required withdrawals - Owners of traditional IRAs and 401(k)s are usually required to start taking withdrawals from these accounts once they reach 72. The CARES Act waives these required minimum distributions for this year.

"If people need the money, they can still tap into these funds," Sullivan said. "But, if not, this provision gives the money even more time to grow on a tax-deferred basis.

Increase in retirement plan loan limit - 401(k) investors who qualify for COVID-19 relief can now borrow up to $100,000 from their accounts, up from $50,000, provided their plan allows loans.

"We recommend that you exhaust some of the other provisions associated with the CARES Act first, such as mortgage and student loan relief, or using the direct payment to bridge the gap on current expenses before taking a distribution or loan from your retirement account," Sullivan said. "If you decide to take a withdrawal or loan we recommend you work with your financial advisor to consider developing strategies to recontribute or pay back these funds over time to reduce any long-term impact to your retirement goals."

Another part of the CARES Act provides $349 billion to help small businesses with fewer than 500 employees retain workers and avoid closing. The Paycheck Protection Program provides federally-guaranteed loans to small businesses that maintain their payroll during this emergency. Significantly, these loans may be forgiven if borrowers use the loans for payroll and other essential business expenses such as mortgage interest, rent and utilities, and maintain their payroll during the crisis.

"Small businesses are really the economic backbone in many of the communities in which we have our offices," Sullivan said. "I would certainly encourage our clients who are business owners, and any business owner, to explore this opportunity."

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