SECURE Act and CARES Act

Over the last 18 months, Congress implemented two significant bills that have impacted retirement savings accounts. The SECURE Act was a bi-partisan effort directed at improving the ability of American citizens to increase retirement savings. The CARES Act was passed in response to the economic turmoil caused by the Covid-19 pandemic. Each of these bills created short-term and long-term impacts on several retirement vehicles, specifically Individual Retirement Accounts (IRAs). We’ve had a number of clients ask about these changes so we thought it would be helpful to address a few of these topics.

What impacts did the SECURE Act have on IRAs?

The most notable impact the SECURE Act had on retirement accounts, such as IRAs, was changing the age when required minimum distributions (RMD) begin. Prior to 2020, individuals with IRAs – and other tax-deferred accounts like 401ks – had to begin taking RMDs when they turned 70 ½. These accounts allow investors to defer taxes into the future while they are working to help accumulate funds for retirement. The IRS mandated that at age 70 ½, account holders must take minimum distributions each year so these funds could be taxed. The SECURE Act pushed the RMD age back to 72.

The SECURE Act also changed the rules regarding RMD contributions after age 70. Prior to the bill passing, IRA owners were not permitted to make contributions to their accounts after age 70 – even those who continued to work. The SECURE Act removed this restriction to improve financial readiness for retirement. Now individuals over age 70 can contribute to IRAs if they have earned income. Passive income is ineligible for IRA contributions. You can even make these contributions if you must take an annual RMD.

Did the SECURE Act change qualified charitable distributions (QCD)? How do I report a QCD when I file my annual tax return?

The SECURE Act clarified the timing of when IRA account owners can make qualified charitable distributions (QCD). Although the RMD age was pushed to 72, IRA owners are still eligible to make QCDs starting at age 70 ½. QCDs allow funds to be distributed from an IRA directly to a charitable organization tax free, which can be a great tax planning strategy when subject to annual RMDs. Importantly, the QCD amount counts toward fulfilling the annual RMD. Thus, you can satisfy your required distribution and minimize the tax implications of the RMD. An IRA account owner can distribute up to $100,000 per year to a qualified 501(c)(3) charitable organization.

QCD amounts are included in the annual 1099-R that you receive from Schwab or Fidelity. This tax form reflects both the total distribution amount and how much is taxable. The QCD amount will be included in the taxable portion on the 1099-R. This often creates confusion. Unfortunately, custodians like Schwab and Fidelity will not make adjustments on the 1099-R to account for these tax-free distributions. It is imperative to work with your tax professional to make sure these QCD amounts are excluded from the taxable portion when filing your return. It is up to you to ensure it is properly reported to the IRS.

Under the CARES Act, the IRS waived all IRA distributions in 2020. If I took my RMD and then repaid my account, how will this be reported on my 2020 tax forms?

Shortly after the passing of the CARES Act in late March 2020, the IRS announced that IRA distributions, including RMDs, were not required for 2020. Individuals who had made distributions prior to the announcement were able to “repay” their accounts prior to August 31, 2020. Doing so effectively meant that no distributions had been made and no taxes were owed.

For individuals who did take withdrawals and had automatic tax withholding from those distributions, it created a tricky issue. Per the instruction of custodians like Schwab and Fidelity, account owners needed to repay the total gross distribution amount to their IRA accounts. The withholding portion would still be sent to the IRS at the end of 2020 and counted toward their 2020 tax liability.

So how will this work on the 1099-R tax forms? For individuals who repaid their 2020 RMD, the 1099-R will still report the original distribution along with any portion that was withheld for tax purposes. IRA account owners will receive a tax form 5498 that shows the deposit back into the IRA.

The 5498 is typically available in May, after the tax filing deadline. IRA owners will need to report the distribution and the re-deposit in the same manner as if it were a 60-day rollover. Under the IRS rules, an IRA withdrawal that is repaid within 60 days will not be treated as a taxable distribution (one 60-day rollover is allowed every 12 months). The CARES Act extended the 60-day timeline in 2020.

This is a unique situation and emphasizes the importance of working with your tax professional to make sure this information is reported properly to the IRS.

If you have additional questions about these changes and how they may impact your financial plan, please contact us today.

Will Goodson

Will is a senior advisor who designs financial plans and investment strategies for clients. He is a University of Texas graduate and a CERTIFIED FINANCIAL PLANNER™ professional. Additionally, Will has obtained the National Social Security Advisor (NSSA®) designation and works closely with wealth management clients to determine the most optimal strategies for taking Social Security and Medicare.

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