Category: Financial Planning

New Rules and Ways to Use HSAs/FSAs

People who own a high-deductible health insurance plan may have the ability to open a health savings account (HSA). They can contribute pre-tax income to an HSA and invest the money for tax-free growth in a variety of mutual funds, stocks and exchange-traded funds (ETFs).

The funds may be withdrawn tax-free when used to pay for qualified expenses, such as the plan’s high deductible, copayments and coinsurance. The funds also can be used to purchase a wide range of health-related products.

However, a recent poll found that 40 percent of respondents who have access to a health savings account do not fully understand them. Perhaps that is why legislation passed last year that increased eligible uses of HSA funds largely went under the radar. The CARES Act included a provision that greatly expanded the number and types of health-related products and services that can be paid for with money from an HSA or an employer-sponsored Flexible Spending Account (FSA). The following list includes many of the newly eligible expenses (some require a Letter of Medical Necessity (LMN) from a licensed provider):

  • Over-the-counter medications, such as for fever, cold and flu, headache, muscle aches, acid, heartburn and indigestion relief, allergy and sinus relief, anti-diarrheal and constipation medicine
  • Toothache relief
  • Skin and rash ointments, medicated body lotions
  • Rubbing alcohol
  • Thermometers
  • Band-Aids and bandages
  • Kinesiology tape
  • Hot and cold therapy packs, cooling headache pads
  • Eye drops
  • Facial cleansers, face wipes
  • Prescription acne medication and over-the-counter acne treatments
  • Sunscreen and SPF moisturizers (including expensive anti-aging facial lotions with SPF protection)
  • Lip balm for sun protection and chapped lips
  • Sleep and snoring aids
  • Smoking cessation nicotine gum, patches, lozenges, inhalers and nasal sprays
  • Prescription sunglasses
  • Humidifiers, air purifiers and filters
  • Dietician fees
  • Some mental health treatments and services
  • Prescription hormone replacement therapy
  • Birth control pills
  • Pregnancy tests
  • Fertility tests
  • Fertility treatments such as in vitro fertilization, intrauterine insemination, fertility medication, the temporary storage of eggs or sperm
  • Birth classes and medically certified doulas
  • Breast pumps, breastfeeding classes, absorbent breast pads, breast milk storage bags
  • Baby monitors and potty training undies
  • Feminine care items, such as pads, tampons, cups and sponges
  • DNA/Ancestry kits

In 2021, the contribution limit for a health savings account is $3,600 for individuals and $7,200 for families; anyone age 55 or older can make an additional $1,000 annual contribution.

Just recently, the IRS published guidelines for employers regarding the use of Flexible Spending Account funds. Because of social distance guidelines and shutdowns in 2020, many people continued to work from home and contribute to their FSA but were unable to use those funds, which are generally designed to be used in the year saved (or otherwise lost).

The new guidelines allow employers to carry over or extend the grace period for unused health and/or dependent care FSA funds to the immediately following plan year. This new rule is retroactive for the 2020 and 2021 plan years. Note that while the IRS permits these new extension rules, it’s up to employers to decide what they want to do.

Roth Conversion in 2021?

Roth Conversion in 2021?In 2020, a year when all income brackets benefited from lower tax rates, the stock market took a nosedive at the beginning of the pandemic. For investors sharp enough to see the opportunity, this was an ideal time to convert a traditional IRA into a Roth IRA.

When you conduct a Roth conversion, the assets are taxed at ordinary income tax rates in the year of the conversion. So, the best time to do this is when your current income tax rate is low and when your IRA account balance loses money due to declining market performance. Once you convert the account to a Roth, those assets continue to grow tax free and are no longer subject to taxes when withdrawn later.

If you believe those stocks will rebound, you can direct the traditional and new Roth IRA custodians to move the shares as they are, rather than selling them for cash. Or, if you are converting the entire account and choose to remain with the same brokerage, you can simply instruct the custodian to change the account type. This way you can keep the same investments, pay applicable taxes on the account balance at the time of the conversion, and then never have to pay taxes on future gains.

While the stock market did recover in 2020, many market analysts believe equities are currently overpriced and could experience another correction this year. On top of that, with Democrats now in control of the White House and both houses of Congress, many expect legislation that will increase income taxes, at least among wealthier households.

Therefore, in order to avoid higher taxes on a long-accumulated traditional IRA, 2021 might be a good year to conduct a Roth conversion. The key is to try to time that conversion with a market loss. By conducting a conversion before income taxes increase, you’ll pay a lower rate, and all future earnings can grow tax-free and be distributed tax-free. Bear in mind, too, that a Roth does not mandate required minimum distributions at any age. The full account balance of a Roth has the opportunity to continue growing for the rest of the owner’s life.

A Roth conversion is not the best strategy for everyone. Consider the following scenarios that are not ideal for conversion.

  • An investor under age 59½ will be assessed a penalty on newly converted Roth funds withdrawn in less than five years, so this might not work for an early retiree who needs immediate income.
  • If you expect to be in a lower tax bracket during retirement, you should wait until then to pay taxes on distributions of your traditional IRA. Also, if you think you might relocate to a state with lower or no state income tax during retirement, not converting eliminates state taxes on that money entirely.
  • Watch out for a bump in income taxes on a Roth conversion. You might not want to convert if those assets put you in a higher tax bracket during the year of conversion.
  • Also note that if you convert after age 65, higher income reported that year could increase premiums for Medicare Part B benefits, as well as taxes on Social Security benefits.
  • If the non-spousal IRA beneficiary is likely to remain in a lower tax bracket than the owner, he might as well leave the assets in the traditional IRA. Otherwise, the owner will waste more of his estate’s assets to pay taxes on the conversion.
  • If you don’t have available cash outside the traditional IRA to pay the taxes on the conversion, the money will come out of the account and substantially drop the value. Consider whether or not your investment timeline is long enough to make up for that loss.
  • If your goal is to leave that IRA money to a charity, don’t bother to convert. Qualified charities are exempt from taxes on donations.

If you’re planning to leave a Roth IRA to your heirs, they also enjoy tax-free distributions as long as that Roth was opened and funded for at least five years before you pass away. This is another reason why it might be better to convert to a Roth IRA sooner rather than later.

The Impact of COVID on Life Insurance

If someone you know died from COVID-19 and had an existing life insurance policy, there should be no problem receiving the death benefit. The terms of a life insurance contract cannot be changed after purchase, so anyone with a policy before the pandemic will continue to be covered as long as premiums are paid.

However, the life insurance industry is in a quandary right now when it comes to new applicants applying for policies.

Some insurers have placed an age limit on applicants to whom they will sell policies. Travelers who have recently visited countries with a significant outbreak and people currently infected with the virus are generally asked to wait until after they have quarantined or recovered to apply for life insurance. While the coronavirus has had a high fatality rate among people age 65 and older, the death rate has fluctuated among demographics over the past year as the virus spread from metropolitan areas to more rural parts of the country.

With this in mind, now is probably one of the most challenging times to apply for a life insurance policy. In the past, applicants have had to answer standard questions regarding their medical history. Today, most also will have to disclose if they have been treated for COVID-19. Bear in mind that even people who did not become severely ill could suffer medical conditions in the future resulting from the infection. However, it is best to answer that question honestly, because any future claims could be denied if it is found the applicant lied about his or her COVID experience on the application.

As the data continues to be assessed, it is likely that insurers will adjust their terms and rates in response to the recent pandemic. It is possible, in fact quite probable, that data pointing to enduring effects of COVID-19 will be included in life insurance underwriting standards in the future. This could increase premiums for COVID-19 survivors – or result in denial of coverage altogether.

In the past, there were life insurers that sold low-cost, low-payout policies without a medical exam or extensive health questions. But these days, given how quickly the coronavirus can take a life, applicants age 60 and older would be hard-pressed to qualify for one of those “guaranteed issue” policies.

In fact, pre-existing health conditions such as diabetes and asthma – which are highly susceptible to the ravages of the coronavirus – may undergo more scrutiny in the future. While pre-existing conditions are no longer a qualifying issue for health insurance, they are very much a part of the life insurance underwriting process and do increase individual premiums.

There is one silver lining for life insurance applicants: Some insurers have eliminated the normally required physical exam due to social distancing restrictions. Others have opted to postpone the in-person exam but offer immediate temporary coverage with a limited death benefit. A couple of life insurers in Connecticut and Massachusetts even offer a free, three-year term life policy to frontline workers in appreciation for their work during the pandemic. Eligible applicants include in-hospital personnel and first responders who have the greatest risk of exposure to the coronavirus.

Anyone who has lost their income due to the pandemic and is in danger of not being able to pay life insurance premiums should call their carrier to see if there are options to continue coverage. Some companies have agreed to defer premiums for up to 90 days rather than cancel coverage for people likely to find employment soon. It’s a good idea to call and find out rather than miss payments and hope your insurance company chooses not to notice.

What To Know About Filing For Bankruptcy

About one million Americans file for personal bankruptcy each year, with one in 10 households having filed at some point. Given the loss of jobs, reduced income, and the coronavirus recession in 2020, those numbers could increase this year if the economic recovery is not both swift and omnipresent.

There are two main types of personal bankruptcy: Chapter 7 and Chapter 13. Chapter 7, which is the more common option, will liquidate the filer’s assets in order to discharge all or a portion of the outstanding debt. People generally choose this route because they are in way over their heads and do not earn enough income to pay their debts in any type of normal time frame.

Chapter 13, on the other hand, provides some immediate breathing room while helping the filer develop a payment plan based on a reduced percentage of the debt. This percentage is determined by how much he makes and what he can feasibly pay each month. While a Chapter 7 bankruptcy remains on your credit report for 10 years, while Chapter 13 bankruptcy is a bit less punitive staying on record for only seven years. As the filer works to pay down his debt and sticks to his plan, his credit score will gradually improve over time. In some cases, the debtor may be able to apply for an FHA, VA, or USDA home loan a year after his bankruptcy filing, or two to four years if applying for a conventional mortgage.

Bankruptcy can provide immediate relief from creditors calling and threatening to evict, foreclose, repossess, shut off, or garnish wages. However, be prepared for some level of pain, such as the bankruptcy court seizing property to be sold to pay your creditors, and/or your credit cards being canceled.

You may see television ads to get debt relief without having to file bankruptcy. Be aware that while these programs may negotiate a debt settlement to something you can better afford, they will not skirt the wrath of the dreaded credit rating agencies. Any time an entity negotiates a reduction in your debt, this will show up as a negative factor on your credit score, and will likely remain that way for many years. A more recent issue that not everyone is aware of is that some employers have started checking the credit reports of job applicants. This makes it all the more difficult to pay off your debt if you can’t get a job because of your past payment history. Your best option is to secure a reliable income before you work with a debt relief agency or file for bankruptcy.

Before entering any type of debt relief program, it’s a good idea to consult with a qualified, non-profit credit counseling agency for a free debt analysis. Don’t go to just anyone; make sure it is a legitimate resource which, by law, is required to serve your best interest. Shady debt counseling vendors are inclined to recommend a debt solution that works out better for the agency than their clients.

If you do decide to file for bankruptcy, be aware that court fees cost about $300, plus lawyer fees tend to run between $1,000 and $3,000 for a Chapter 7 filing and approximately $3,000 to $6,000 for a Chapter 13 filing.

Last Minute Financial Moves for Year’s End

There are certain year-end financial transactions that must clear by Dec. 31 to be reported on the 2020 tax return. It’s important to take a good look at your financial portfolio in light of the plethora of unusual events that occurred this year. Now is a good time to see if you have fallen off track and reposition your portfolio for better opportunities in 2021.

Investment Portfolio

Despite the dramatic stock market drop that accompanied the outbreak of COVID-19 on our shores, markets have recovered remarkably well. This means the traditional strategy of harvesting gains and losses at year-end could be appropriate for many investors. When your capital losses are more than your capital gains for the year, you can claim up to $3,000 to reduce your taxable income and even carry over remainder losses on next year’s tax return.

Harvesting is also a good way to rebalance your asset allocation strategy, so you are well-positioned to meet long-term goals starting in the New Year. If you are interested in selling winners and losers to mitigate your 2020 tax liability, make sure, these transactions are fully completed by Dec. 31.

Tip: Some investors might be tempted to sell shares for a loss and then buy back into that position. However, take pains to avoid running afoul of the “wash rule,” which is when an investor purchases a “substantially identical” security within 30 days of a loss sale. Doing so diminishes the losses you can claim on your taxes, even if you buy it back in January. This also can occur inadvertently through automatic dividend and capital gains reinvestment purchases – so monitor your holdings and make sure there’s a 30-day lag between sale and reinvestment.

Retirement Accounts

For workers who invest in an employer-sponsored 401(k) plan, you have until the end of the year to defer up to $19,500 ($26,000 if you’re age 50 or older) from your paycheck. If you’d like to stash away more money, the combined annual limit for traditional and Roth IRAs is $6,000 ($7,000 for age 50+) for 2020. Note, however, that contributions for these accounts may continue to be made up until you file your 2020 tax return.

Tip: Given the potential for higher taxes under the new administration, it might be wise to max out after-tax Roth IRA contributions while taxes are low. When taxes are higher, traditional IRAs and 401(k)s tend to be more valuable because tax-deferred contributions help reduce current income. You also might want to convert a portion of traditional IRA funds to a Roth this year to take advantage of the lower tax environment. Convert only a strategic portion to avoid tipping your current income into a higher tax bracket.

Retirement Plan Withdrawals

You have only until year-end to withdraw up to $100,000 without penalty from a retirement plan if you have been directly affected by COVID-19 this year. Note, too, that subsequent income taxes on this withdrawal either can be spread out over a three-year period or avoided entirely if you re-contribute the funds over the next three years.

Tip: Legislation passed early in the year permits retirees to skip taking required minimum distributions in 2020. However, because the stock market has recovered nicely, and in light of higher taxes in the future, it might be a good idea to go ahead and take this distribution before year-end.

Education Savings Accounts

If your college student received a tuition refund this year because the class experience moved online, be aware that any refunds of College Savings 529 plans must be deposited back into that account. Otherwise, that money is considered a distribution for non-qualified expenses. Make that deposit back into the 529 account by year-end to avoid any taxes or penalties.

Tip: Parents and grandparents can reduce their estates by making a year-end gift to a student’s 529 plan. You may gift up to $15,000 ($30,000 for married couples) per beneficiary without incurring gift taxes or affecting your lifetime gift tax exemption ($11.58 million).

A Realistic Picture: Will You Be Able to Afford In-Home Elder Care?

By the end of September, the nation had recorded over a quarter million cases of COVID-19 and nearly 60,000 deaths in nursing homes that were attributed to the disease. The recent pandemic offers yet another reason why more than 90 percent of seniors say they want to grow old in their homes rather than move into a senior housing facility.

But just how feasible is that goal, from a financial perspective? Much depends on how independently you can live for the rest of your life. That is something we cannot plan. Even elderly people with an excellent gene pool and no known health conditions can experience a fall or other accident that could render them helpless. And the older you get, the higher the risk of cognitive decline, which can make it unsafe to live alone.

However, you might still be able to live out your golden years in your own home if you can afford to pay for in-home care. Each year, Genworth Financial publishes a Cost of Care Survey that examines the cost of various types of long-term care. However, when you break down the assumptions, you might find the survey’s cost estimations are lower than what many people actually pay.

For example, the average fee for homemaker services (household chores, prepare meals, run errands, accompany to appointments) is $22.50 an hour. For a home health aide (help with bathing, dressing, toileting and simple first aid) the average hourly wage is $23. Depending on your location, you could pay more for a company that employs home workers or pay less for independent caregivers. Be aware that if you choose the independent route, you’ll have to vet abilities, trustworthiness and schedule your own back-up resources if they don’t show up for some reason.

However, according to the Genworth report, the average daily rate for a homemaker is only $141, or $4,290 a month. That breaks down to about six hours a day. What happens when you reach a point where it’s unsafe for you to mill about the house by yourself because you might leave the stove on, or you might fall and there’s no one to help. If you pay a caregiver to stay with you 16 waking hours a day, that would cost you $360 per diem, or about $11,000 a month.

If you don’t sleep well and tend to have to use the restroom at night, you might need to pay for a night shift caregiver just to make sure you get around OK. That means 24-hour care will run you more than $16,000 a month, or $195,000 a year – and that’s in today’s dollars.

If you’re planning on in-home care 10 to 15 years from now, those rates will probably be higher.

There are a couple of other issues to note. First, you don’t need to be completely incapacitated to require 24-hour care. It could be as simple as mild but gradual progressive dementia; a mobility issue; or fear of living alone after a spouse dies. Also, if a couple is living comfortably at home with 24-hour care, that expense probably won’t go away if one spouse dies – but household income will probably decrease.

There are alternative ways you might consider that would allow you to stay home throughout your elder years, and the earlier you plan for them the better they will work out. First of all, be nice to your grown children. Not only might you prefer to move in with them or they move in with you, but if things don’t work out, they will likely be the ones to determine where you live out your golden years.

Second, consider your housing situation and if you can negotiate room and board to one or more caregivers in exchange for their help. You might also consider cohabitating with an elderly friend or family member to help share caregiver fees, and perhaps eliminate the need for excess hours a day. Better yet, consider moving in together with several friends to help spread out the costs and improve your chances that some seniors will be less infirmed than others.

Since 2010, on average more than 10,000 Baby Boomers turned age 65 per day and by the year 2030, all Baby Boomers will be 65 or older. Among them, 52 percent will require long-term care in their lifetime. If you want to remain at home but worry about the cost of caregiving, you’ll have plenty of housemates from which to choose.

Long-Term Financial Impact of COVID-19

As bad as the economy is right now due to the COVID outbreak in the United States, many economists are predicting that the long-term outlook is much bleaker. Alas, Congress and the Federal Reserve’s efforts at stimulus and interest rate management have done much to keep the economy and stock market afloat. However, small businesses – the backbone of America’s employment growth – are closing every day. As consumer spending reduces further, the impact will likely affect Wall Street. Consequently, share prices may soon begin correcting to reflect the future more so than the present.

It should come as no surprise, then, that 88 percent of respondents admit they are worried about their finances, according to a recent survey conducted by the National Endowment for Financial Education.

This economic decline has presented an interesting mix of demographics who have or will be affected the most over the long term. For instance, many low-income workers have remained employed throughout the pandemic because their jobs are considered “essential services.” This includes check-out clerks at grocery stores; laborers who work outdoor jobs; nurses, orderlies, and nursing home attendants.

By contrast, many white-collar business owners – such as physicians and dentists– closed shop for a few months and/or have reduced the number of patients they see. Alas, 79 percent of those surveyed with a household income of more than $100,000 a year said they were at least somewhat concerned about their financial situation.

Millennials are the generation most likely to change the way they manage their finances in the future. Although many have remained employed in white-collar jobs – primarily due to their technology-enhanced skills and knowledge – they have reason to be concerned. After all, this generation has already lived through the market downturn following 9/11, the Great Recession, and now a historic economic decline caused by the coronavirus. In fact, once they finally got a foothold in their careers, this recent downturn obliterated the last five years’ worth of economic growth. Going forward, finance experts predict that these young adults will be more focused on stock-piling savings, buying modest homes when the real estate market corrects, and generally working on a long-term plan for financial stability.

While those strategies are mostly good, it’s a shame this generation had to learn the hard way – all while encumbered with historically unprecedented student loan debt. However, as these lessons are passed down through generations – much the way the Great Depression had a lasting impact on the Silent Generation – U.S. populations may see higher savings rates at the expense of lower GDP growth.

For households recovering from financial stress or looking to create a plan for stronger financial resiliency no matter what the future holds, consider the following strategies.

  • First priority: Save from three to six months’ worth of liquid, emergency funds should you encounter a large expense, such as an auto repair or a temporary loss of income.
  • Learn how to budget effectively, which includes examining if you overpay for basic household needs or do not know how much of your income is spent superfluously every month.
  • Take stock of the full scope of your financial resources, including:
    • Savings accounts
    • Investment accounts
    • Retirement accounts
    • Health savings accounts
    • College savings accounts
    • Whole life insurance
    • Real property
    • Structured settlements
    • Vehicles (auto, boat, motorcycle, recreational)
    • Art, jewelry, wine, or other high-value collectibles
    • Expensive furnishings and household items
  • Develop a Plan B to help supplement any income loss right now; a Plan C to help bolster your savings rate once you’re back to full income; and a Plan D strategy for income replacement in case you’re ever in a situation like this again.

Financial setbacks will come and go; it’s the lessons we learn from them that should have the most staying power.

Tips for Retiring in the Next 10 Years

The stock market continues to perform with relative resilience, despite the current economic decline. But to be clear, without 100 percent participation in the economy – in terms of small business job creation, consumer spending, and company growth and expansion – the stock market is apt to reposition prices to reflect slower growth. With no containment or control of the pandemic on the horizon, there is plenty of uncertainty associated with future financial planning.

Anyone looking to retire in the next 10 years or so may want to take a fresh look at their current retirement income plan. In fact, they might need a Plan A, B, and C in order to stay flexible – with C being the option to continue working longer. The following are portfolio tips to consider for a 10-year time frame until retirement.

Emergency Fund

If there was one financial tip worth following pre-pandemic, it was to have liquid cash savings of six months to a year’s worth of expenses available. Workers who did are probably pretty relieved about now if they lost their job or had hours reduced. Having substantial cash available can save you from raiding retirement accounts and/or your investment portfolio.

In preparation for retirement, that cash buffer is even more important. Some advisors recommend a liquid savings fund to cover one to three years’ worth of expenses. That’s because once you’re on a fixed income, you’re not likely to replenish that account. What it can do is supplement variable retirement income that is reliant on the markets. Having a cash buffer gives investments time to recover from temporary losses so you don’t have to plunder your principal.

Status of Social Security

While you may know what your benefit level is for retirement at a certain date, be aware that your benefit could change – even after you’ve retired. Recent research has found that thanks to the loss of FICA revenues resulting from COVID-19, the Social Security Trust Fund might run out of money four years earlier than predicted: as early as 2032. You may want to consider other forms of reliable income in case your benefits are reduced in the future.

Guaranteed Income

Speaking of reliable income, Olivia Mitchell, executive director of the Wharton School’s Pension Research Council, recommends that an annuity option become a staple in employer-sponsored retirement plans. Annuities generally offer an option for issuer-guaranteed income for life. With 10 years until retirement, allocating money to an annuity can help build a separate income stream to supplement Social Security benefits. Even if your employer doesn’t offer an annuity option in your 401(k) plan, you can purchase one separately using other assets.

Employer-Sponsored Retirement Plans

Speaking of the 401(k), consider that when this plan was first established in 1980, the marginal federal income tax rate was 43 percent. Today’s tax rates are historically quite low, so for the time being you might want to consider allocating more savings into a Roth IRA. This means you’ll pay taxes on that money at today’s low rates, but going forward it can grow tax-deferred and be withdrawn tax-free. But don’t leave money on the table if your employer offers a matching 401(k) contribution. Roth IRA contributions are limited to $7,000 (2020) and some deferred income can help reduce your taxes today – so plan accordingly.

Roth Conversion

By the same token, you may want to take advantage of today’s lower tax rates by converting at least some traditional IRA funds to a Roth or by making backdoor Roth IRA contributions. Be aware, however, that you must pay taxes on converted funds, so consider a gradual transition over multiple years to help you stay in a lower tax bracket.

Investor Portfolio

Some market analysts are predicting a “new normal” going forward, which could provide some interesting investment opportunities. Ideas include new operating business models based on a largely remote workforce, population spread as people move out of cities into more affordable rural areas, and innovations borne out of newly created demand. While a buy-and-hold strategy is a common advice for equities, it’s important to stay flexible. As long as you remain within your customized asset allocation strategy, you might want to use your equity portion to explore new ideas that could offer higher return opportunities over the next decade.

Borrowing From Your Retirement Plan: New CARES Act Rules

It’s been nearly half a year since Americans first became widely aware of the coronavirus contagion within the United States. While for a brief month it looked as if we had the virus in hand, since then it has spread wildly out of control in many areas.

People who did not suffer dramatic financial consequences in the early stages of the pandemic could see some hard days ahead. For this reason, it’s a good idea to become familiar with the new relaxed rules associated with withdrawals from tax-advantaged retirement plans.

In late March, Congress passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act). This bill offered provisions related to distributions from retirement accounts such as an IRA or 401(k). One of the key goals was to enable workers to make penalty-free withdrawals from a retirement plan to help sustain them while out of work due to the coronavirus.

To be eligible to make penalty-free withdrawals, plan participants must meet one of the following criteria:

  • The account owner, spouse or a dependent is diagnosed with COVID-19
  • The account owner experiences one of the following financial consequences due to the virus:
    • Furloughed
    • Laid-off
    • Work hours reduced or place of business closed (including for self-employed)
    • No access to childcare
    • Quarantined

The Act stipulates that workers can self-certify that they meet at least one of the criteria. Be aware, however, that if it is later discovered that the account owner did not meet the criteria for a coronavirus-related distribution, he might be required to pay the early withdrawal penalty.

Also note that while this penalty is waived for qualified workers, they must still pay income taxes on the amount withdrawn. However, there are a few ways to mitigate the income tax burden on those withdrawals. The first is to through a regular distribution. These are the parameters:

  •  You have up until Dec. 30, 2020, to make a distribution
  • The total aggregate limit is $100,000 from all plans and IRAs
  • The distribution waives the 20 percent income tax withholding requirement
  • Income taxes will be due when filing a 2020 tax return
  • Retirement account owners who no longer work for an employer are free to take a distribution
  • Current employees may take a distribution only if the employer plan allows for a hardship or in-service distribution (note that the CARES Act permits employers to amend plan documents to allow coronavirus-related distributions)

While a retirement plan distribution does trigger income taxes for the tax year withdrawn, you can spread the tax burden out over three years. For example, let’s say you withdraw $18,000 this year. You may report the full amount as income on your 2020 tax return; or you can claim $6,000 a year on your 2020, 2021 and 2022 returns. This strategy reduces the chances of bumping your income into a higher tax bracket.

The second way to is to pay the distributed amount back into your retirement plan. Initially, you will have to pay income taxes on the amount withdrawn. However, if you pay it back within three years, you can file to get the taxes you paid refunded. One caveat with this plan is that eligible retirement plans will treat repayment of this type of distribution as a rollover event for tax purposes. Be aware that if the retirement plan does not accept rollover contributions, it is not required to change its terms for this purpose.

Your third option is to withdraw money as a loan if your employer permits loans from the retirement plan. This is another scenario in which you must repay that money within a specified time period. You do not have to pay income taxes on the loan, but you do have to pay interest on the amount borrowed. The good news is that the interest you pay also goes into your account.

Under normal circumstances, retirement account loans are limited to $50,000 or 50 percent of the account balance, whichever is less. But for a coronavirus loan, you may borrow up to 100 percent of your vested balance or $100,000, whichever is less. You will need to repay that loan within the plan’s stated repayment period, although the CARES Act gives 2020 borrowers an additional year to repay this type of loan from an eligible retirement plan. Be aware though that you’ll owe both income taxes on the outstanding balance and the penalty for withdrawals made before age 59½ if you do not repay that loan in time.

Note that these CARES Act provisions are available only for the first 180 days after the Act was passed, which was on March 27, 2020. As Congress debates new legislation to aid struggling Americans suffering from the pandemic, this provision could be extended.

How To Use Qualified Charitable Distributions For Charitable Giving

Each year, millions of Americans make donations to charitable organizations and receive something in return – a tax break. However, the 2017 Tax Cuts and Jobs Act curbed this tax advantage because it reduced the number of people eligible to claim a charitable deduction by raising the standard deduction. For 2020, the standard deduction is $12,400 for individuals and $24,800 for married couples filing jointly. If your list of deductions is not greater than those amounts, there is no tax benefit to itemizing – which means you might not be able to claim your charitable donation.

Without the ability to claim a deduction, some retirees just take their normal required minimum distribution (RMD) and bank the money, pay taxes on it and then make charitable gifts or tithe to their church on a monthly basis. For example, say your RMD is $10,000 and you pay 15 percent in taxes on this distribution. If you want to donate the money as a charitable gift, you’ll have only $8,500 left to do so.

However, there is a way to do this that will give you a tax advantage. A Qualified Charitable Distribution from an IRA enables retirees to claim their standard deduction and receive a tax benefit for their gift. The key is to arrange for the distribution to be made directly from your account custodian to the qualified 501(c)(3) charitable organization so that you do not take possession of the assets.

IRA owners may gift up to $100,000 each year, or $200,000 for a couple that files a joint tax return. Note that this option is available only for IRA owners over age 70½; it is not allowed for 401(k)s, 403(b)s, thrift savings plans, or other qualified plans. The QCD will be reported to the IRS and should be claimed by you on Form 1040 as an IRA distribution, but it will not be taxable. Another perk of this strategy is that the QCD can satisfy your annual Required Minimum Distribution (RMD). Be aware that if your QCD does not meet the full distribution amount required, you will have to withdraw and pay taxes on the remaining balance.

Another benefit of using an RMD for a charitable donation instead of receiving it as income is that this could keep you in a lower tax bracket. Consequently, it can help minimize taxes on Social Security benefits and keep your Medicare premiums low.

Thanks to the Coronavirus Aid, Relief and Economic Security (CARES) Act, RMDs are not mandatory in 2020. That’s because the initial market losses triggered by the COVID-19 outbreak were substantial; by not requiring distributions this year, retirement accounts have more time to potentially recover those losses.

Since it isn’t necessary to take an RMD this year, you might want to just make charitable gifts in cash. The CARES Act also enables this option by increasing the adjusted gross income (AGI) limit for individuals who qualify to itemize on their tax return. In 2020, you may deduct up to 100 percent of donations (up from 60 percent) against your AGI. For example, if you earn $500,000 in income, you may donate $500,000 and the entire amount is tax-deductible. This strategy is available to people younger than age 70½ and offers a benefit similar to the QCD.

Even if you don’t qualify to itemize, you may claim up to a $300 charitable gift deduction on your 2020 tax return. As always, it’s best to seek the advice of a tax professional in order to figure out what is best for your situation.