Stimulus package has helpful provisions for retirees

Although most retirees are insulated from the worries about losing their jobs that plague younger workers amid the worldwide coronavirus pandemic, many are worried about cash flow and concerned about taking distributions from their shrinking retirement accounts.

The $2 trillion federal stimulus package enacted last week, known as the Coronavirus Aid, Relief and Economic Security, or Cares Act, offers several benefits to retirees. For example, some retirees may be surprised — and relieved — to learn that they will qualify for the one-time rebate checks of up to $1,200 per person because eligibility is based on income, not employment.

Individuals with adjusted gross incomes of up to $75,000 will receive a one-time payment of $1,200 and married couples with AGI of up to $150,000 will receive a one-time payment of $2,400. Individuals whose income is between $75,000 and $99,000 will receive a partial rebate check, as will married couples with incomes between $150,000 and $198,000. Those with incomes above those maximum thresholds will not receive a check.

The rebate payments will be based on the latest tax return — 2019 for those who have already filed their federal income tax returns or 2018 for those who want to take advantage of the newly relaxed tax filing deadline of July 15 for 2019 returns. Rebate payments will be deposited in the same accounts in which taxpayers receive their Social Security benefits or tax refunds. All others will be mailed.

About 90% of Americans will receive a rebate payment of some amount, according to Tax Foundation estimates. However, some recent retirees may be disappointed. If their latest tax returns show income above the thresholds from when they were still employed, they will not receive a rebate check even if their current income is below the threshold now that they're retired.

Don’t despair, said Jamie Hopkins, director of retirement research at Carson Group. “These people should be able to get a credit for the rebate amount when they file their income taxes for 2020 next year.” But they won’t get a payment this year, he said.

Speaking of taxes, retirees who pay quarterly estimated taxes have until July 15 to make their payment for the first quarter. Second quarter payments are still due June 15, but that could change. If you expect your income to decline in 2020, you could reduce your quarterly payments to conserve cash.

The Cares Act also waives required minimum distributions from retirement accounts this year so retirees who don’t need the money can leave it in their accounts and avoid paying taxes on those distributions. The waiver applies to traditional individual retirement accounts, SEP IRAs and SIMPLE IRAs, as well as 401(k), 403(b) and government 457 plans.

The RMD waiver also includes initial distributions for people who turned 70½ in 2019, who had the option of delaying their first distribution until April 1. That means they get to skip two RMDs in 2020.

If retirees can afford to skip their annual IRA distribution this year, it offers some enormous planning opportunities, particularly when it comes to Roth conversions, said Jeffrey Levine, director of advanced planning at Buckingham Strategic Partners.

Normally, taxpayers who are subject to RMD requirements must take their distribution first before converting excess amounts in their IRA to a Roth IRA. That could lead to a large tax bill, since both the RMD amounts and the Roth conversion amounts are taxable. This year, IRA account holders can skip the RMD and instead convert amounts of their choice to a Roth IRA to create future tax-free income.

“Just because your retirement accounts are down doesn’t make it a good time to convert to a Roth,” Mr. Levine cautioned, noting that account values could slip even further, and account holders no longer have the recharacterization do-over option. “But if you were considering a conversion from a tax perspective, then this could be a very good time to do it.”

Skipping RMDs could lead to lower income tax bills for 2020 and could also reduce future Medicare premiums by allowing people to avoid or reduce the impact of high-income surcharges. Medicare premiums for 2022 will be based on 2020 tax returns. Surcharges apply once modified adjusted gross income, which is AGI plus any tax-exempt interest from municipal bonds, exceeds $87,000 for individuals and $174,000 for married couples in 2020. Those income thresholds will be adjusted for inflation in 2021 and beyond.

But what about clients who took their RMD at the beginning of 2020, before the relief legislation was approved? One adviser wrote to me asking for guidance for a 74-year old client who took his RMD in January. The client doesn’t need the money. He only took the distribution because he thought he had to. Now the client wants to know if he can redeposit the money in the IRA.

People who took a now-unwanted distribution within the past 60 days can simply redeposit the money in the plan under the once-per-year rollover rule, Mr. Levine said. It’s a bit more complicated for people who took their RMDs earlier in the year.

“But if it can be shown that the individual has been impacted by the COVID-19 crises enough to qualify under the liberal guidelines for a coronavirus-related distribution, then the rollover can still be completed anytime over the next three years starting from the date the distribution was received,” Levine wrote in his recent analysis of the Cares Act. Beneficiaries of inherited IRAs who already took their RMD for 2020 are not eligible for this rollover relief, he added.