CARES Act Retirement Strategies

Summary:

The Coronavirus Aid, Relief, & Economic Security Act (CARES) has some parts that impact our retirement system.

In this show we discuss the main implications including changes to RMDs, early withdrawal penalties from IRAs and 401ks, and how taxes are deferred from retirement withdrawals.
The big question we answer – is there a way to benefit financially from the CARES Act rule changes?

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Podcast Transcript

Tony Shore
Dolphin Wealth Management Inc., and Dolphin Financial Group are not affiliated with or endorsed by the Centers for Disease Control and or any other government agency.

Daniel Wendol
The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, has some parts that impact our retirement system in a major way. In today’s show, we’re going to discuss the main implications toward our retirement system, including changes to the required minimum distributions, removal of early withdrawal penalties, and also the taxation of distributions which has changed during this crisis. But the big question is- is there a way to financially benefit from these changes in the CARES Act?

Hello and welcome to another Dolphin Financial Radio with me Dan Wendol, owner of the Dolphin Financial Group alongside me, faraway actually, is Tony Shore recording our podcast this week from our own respective homes. Today, Tony, we’re talking about the CARES Act. I’m sure you’ve heard a lot about this.

Tony Shore
I have. Basically to define that what you’re talking about, is that $2 trillion relief package or relief bill, I guess you should call it aid to help businesses and individuals deal with the economic turmoil caused by COVID-19 or Coronavirus, right?

Daniel Wendol
Right. And a lot of people talking about the stimulus portion the checks and the SBA loans, the small business loans.

Tony Shore
Those stimulous checks. Yes.

Daniel Wendol
Yeah. Plus the extension of employment benefits. There’s been different layers to this, but I want to talk about the parts of it that impact retirement because this is a retirement planning show, isn’t it?

Tony Shore
I think. Well, we get to that once in a while, in between talking about our favorite records, albums, music, um, you know, politics, what’s going on in our lives.

Daniel Wendol
Holiday shows.

Tony Shore
Yes, holiday movies…we did that. No- every week, you offer some very unique perspective, which helps. We need a different perspective because the status quo doesn’t work, especially when it comes to Financial Planning and retirement planning. And a lot of what you hear is a lot of the same take. It’s just a quick take, and then people latch on to it. And that’s what sets you apart from other financial advisors, you’re independent. And you’re an independent thinker. You’re an idea, man, and that helps people because you’re able to look at the big picture and say, wait a minute, you know, let’s do the math. Let’s look at it from this angle. Look at it from all angles. I think that’s important, especially with something like the CARES Act, because, you know, you hear a lot of things out there. And of course, people are focused on how much money am I going to get out of it.

Daniel Wendol
Not only that, what kind of tricks they can do. Some of the tricks that I’m seeing people do, and I call it tricks because that’s what it is, it’s a lot of crap. I’m going to call some some BS on this, but I’ll save that for the end just to keep you awake.

So let’s start with the RMDs. Required Minimum Distributions. We will be quick on this one. I see a lot of discussion on it, but it’s really simple. Every year, you have to take out a required minimum distribution from your IRA.

Tony Shore
If you’re over 70 and a half.

Daniel Wendol
Now the age is 72. Now remember that we did a show on that? So they just suspended it. You don’t have to take your RMS this year. Boom, end of the story. So that’s great for people that don’t need it. But most people that I talk to that are retired, they need the money. They spend it, but you don’t have to. If you have a required minimum distribution and you already took it, you’re out of luck, you can’t undo that. But if you haven’t taken it yet, most people don’t take it to later in the year, you’re not forced to. And that’s also for inherited IRA. So that’s kind of cool. The strategy is, well, maybe you take it anyway, and you do something with it, pay the taxes, but a lot of people will just let it roll. Let it defer. What the interesting part about it Tony, is required minimum distributions are based on what your value was December 31 of 2019. So odds are, the value is higher than the value today. So you may want to defer it, and let it ride and come back.

Tony Shore
Because you’re gonna have to pay those higher taxes. It’s what you’re saying right?

Daniel Wendol
Right, you’re going to pay taxes. And maybe you don’t want to take money out when the markets tanking. You may want to hold on and let it come back.

Tony Shore
So the bottom line and then we can move on from that is that if you don’t have to have that money, right now to live on, let it ride and don’t take one out this year.

Daniel Wendol
It depends on what’s invested in. If it’s invested in stocks, you might consider letting it ride and come back. If it’s sitting in cash or a money market or CD or annuity or something like that, maybe take it out anyway, and spend it or convert it to a Roth. There’s an idea! That’s where a lot of people going with this – Roth conversions. But yeah, I think there’s not too much to it. You don’t want to overthink this RMD. If you’re in this situation where you took your RMD or you’re not sure if you should take it or it’s automated, you may have to actually make a phone call and shut down the automation. I see a lot of people forgetting that. Most of the time, it’s automated. I’ve automated it for a lot of clients, because you don’t want to forget that one as there is a big penalty. But you might have to make a phone call. So my suggestion to those listening that are in that RMD phase, whether through an inherited IRA or they’re older than 70 and a half or 72, hold off. Maybe don’t take it. It’s a nice feeling to say I don’t need my RMD.

Tony Shore
That’d be great, wouldn’t it?

Daniel Wendol
Yeah. Yeah, but we’ve done shows on that. So they just suspending it. I guess they want people to not…see i don’t see the value in it the from from the government’s perspective. Not forcing people to take money out of an IRA. It’s really a very small subset of people that really benefits financially from it. I don’t know why that’s in there to be honest, but whatever. It’s in the CARES Act so be aware. The bigger one, Tony, is this $100,000 withdrawal from IRAs, 401k’s that you’re allowed to take. Have you heard about this?

Tony Shore
Yeah. I mean, I just briefly I heard that. If I want to take money out, you know, I’m not 59 and a half yet. I’m not retirement age. So typically I wouldn’t be able to touch my 401k without a huge penalty, but this year, if I want to take out $500,000 in my 401k, then I could take $100,000 out with no penalties.

Daniel Wendol
Right? So the the penalty is an early withdrawal penalty for age 59 and a half. If you take money out of an IRA, or a 401k, or 403b, something like that, and you’re younger than 59 and a half, unless you have some sort of outlying emergency, or there’s some waivers, most people don’t have those, then you get a penalty. You get a 10% penalty on top of taxes. This is all taxable, by the way. So if you take money out of an IRA or 401k it is taxable. So what they’re doing now is they’re eliminating that early withdrawal penalty. So you could be 40, take $100,000 out of your 401k or IRA, and not get hit with that 10% penalty. And it goes retroactively to January 1, 2020. So the idea is, you can take it out as a freebie. Now red flags go up immediately for me, because you’re taking money out of your future retirement account. The whole point of a retirement account is for retirement, you should never touch that. Right?

Tony Shore
I mean, that’s the advice you’ve given in the past unless you absolutely have to have it.

Daniel Wendol
It’s just delayed gratification versus immediate, but a lot of people are in a situation where they may need it and this is why they did this. Also, it’s taxable. You still have to pay taxes on a withdrawal from an IRA or 401k or 403b, but they changed the law in the CARES Act, and you are allowed to spread that tax over three years. So the question now is, is there going to be a way to be strategic and make a financial move? I see a lot of advisors, I hear them, I read articles on it and they are saying let’s do it, let’s take it and do something else with it. They’re trying to use this as a means to generate some sort of movement of cash out of a 401k, out of an IRA, to invest it differently. Let’s convert it to a Roth! I get a tax free loan for three years, and then I could pay it back, but what can I do with that in the meantime? I saw article that says let’s take my 401k, cash it out, and pay off my home loan. So the question becomes why? Why all of a sudden? Is it just because you avoid the 10% penalty? Or because you could spread the tax over three years?

Tony Shore
There’s some advantage. But here’s my problem with the data and it tell me if I’m right on this. I would think that right now, my money in my 401k…Let’s say I’ve got $100,000 in there. That money in the 401k is tied to the stock market. It’s all in stocksg, right? And pretty much every 401k that’s what’s in. It is stocks right? Tied to the stock market. Well, right now the stock market is down. I mean, obviously we had a week where it went back up a bit, but it could crash again. But pulling money out right now might not be the best idea. You’d think you’d want to leave it in until it goes back up some more before you made a move like that. Right?

Daniel Wendol
Right. So then to counter that argument, these people or these other advisors are suggesting that you take it out now. Your tax burden is low because you have it at a loss or it’s lower. Okay, so you’re paying less in taxes, and someone suggesting then you’re immediately reinvested at these low rates into a Roth so that the growth is tax free in the future.

Tony Shore
Ah, I see. That’s why. I get it now. So you’re still gonna get the growth. It’s just moved over into a Roth.

Daniel Wendol
A lot of people are saying, well, you can use it to pay off other debts. Again, you’re selling at a loss, you’re locking in those losses. But it’s such a very, very specific instrument and situation. So everyone has to do the math on it. You can’t just say oh, this is a great time to convert to a Roth or it is a great time to take out that loan for take out $100,000 and pay off your home loan.

Tony Shore
I mean, now what if my home loan is at 3%?

Daniel Wendol
Well, isn’t paying off 3% better than losing 20% in the stock market? So that’s the case people make. But what about the 20% gain that comes in the stock market? I mean, it’s just there’s a lot of games being played. I don’t like it. I’m glad people are least thinking about it. But here’s where I want to even take a step back, because there’s another stipulation in this CARES Act to do this, to get away with taking out $100,000 from your 401k and not paying a 10% penalty. If you’re 59 and a half and spreading the tax over three years, it must be a Corona virus related distribution. A CRD, another acronym for you.

Tony Shore
CRD. I’ll think about that.

Daniel Wendol
So, what is a CRD? A Coronavirus Related Distribution. You have to have been diagnosed with COVID-19 or your spouse or dependent had to be diagnosed. Or, and here’s where the grayness comes in, you have to have adverse financial consequences. So you had to be quarantined, furloughed, laid off, your hours were reduced, or you had additional childcare responsibilities as a result of this. Can I make the case that I got that I’m financially impacted by COVID-19? Absolutely. I have kids, how about that?

Tony Shore
You can’t meet in person. You can’t meet in person with your clients or prospects. So I could make that argument.

Daniel Wendol
When I was in seventh grade, maybe it was eighth, I had a class on law. I learned the idea of the spirit of the law versus the letter of the law. The spirit of the law says, Hey, if you are somewhat affected by this, you could take $100,000 out of your IRA, and early withdrawal penalties are waived. But the letter of the law says, Man, it’s got to really impact you. I think people are blurring these lines. I think a lot of advisors are suggesting the blurred lines just because there’s an opportunity here. I heard someone say the other day, I’m going to get my free money. It would be great if I can get my small business loan, even though I don’t need it. I mean, it’s out there. I might as well get it and you know, I want my ice cream. I don’t even like ice cream. I’m lactose intolerant, but everyone’s getting free ice cream. I’m gonna take it, right? So I don’t like this whole idea of just doing it for the sake of doing it. If it impacts you, that’s the whole point of this. I think a lot of people are taking advantage of that. A lot of advisors are pushing for people that don’t necessarily need it to take advantage of it. Why does a retiree…and this is this is a tough one…why does a retiree get a stimulus check? They’re not working. So the hours weren’t cut. They’re staying at home. Yeah, maybe they’re inconvenienced. But why are they getting a check? Well, it’s because everyone’s getting a check. So is it fair to give other people a check, and not the people that don’t necessarily need it? And what does need mean and who determines that? So I get the idea of doing a blanket payout, but at the same time, it kind of bothers me what’s going on.

Tony Shore
Yeah, that’s a good point. That’s a perspective I never thought of. If you’re retired and you have your retirement income, it is not affected by the Coronavirus. I wouldn’t think anybody’s retirement income would be affected by this.

Daniel Wendol
Unless a retiree’s income is from the stock market.

Tony Shore
It could be in the stock market, but is that goes up and down. That’s my point. I mean, it’s already going back up and it might go way down again. They say no one knows. But you’re gonna have market volatility and we’re gonna have a bear market at some point anyway, it’s just no one knew this was would be why. So, yeah, that’s interesting.

Daniel Wendol
Right. I deal a lot with retirement. But, to make the case that I’m going to take out $100,000 from my IRA, and and do a Roth conversion, I mean, you’re really stretching it. Unless you were affected by it in some way, but even then…. The reason why people are taking the money out is not to do a conversion or do some financial strategies.

Tony Shore
It’s because they need it to survive, or their business is gonna go bankrupt, or they’re gonna go bankrupt or lose their home if they don’t. So if they’re unemployed and they have to make house payments, because of the Coronavirus a lot of people are out of work, then they could do that to pay off their house so they don’t have to make those payments. And so I can I think that’s legit.

Daniel Wendol
It is. But then there’s the people that say why can’t I do it? I lost my job, but I also have a bunch of money in my emergency fund, which was great. So why can’t I take it and then recharacterize it into a Roth to get future tax benefits? I get it. So I’m not saying that it’s bad to do. I’m not judging people. I’m just saying that a lot of the push from the financial advisor community is trying to take advantage of this and maybe for the wrong reasons. I’d rather focus on the people that are furloughed or laid off, what are they going to do? They’re not really thinking about the tax implications in three years. They’re thinking, How do I get through the next month? So, again, this is a retirement focus show so I wanted to bring that up. But there is an opportunity. Another part of this- is people that are still working and have a 401k can borrow from a 401k. It used to be $50,000 was the max you can borrow. Now you can borrow $100,000 and you can repay it over six years instead of five. So is this a time to borrow from the 401k? We talked about borrowing from 401ks in past shows. I’ve helped clients borrow from their 401k not to do some tricky financial move, it’s to pay off credit card debt that’s at 20%. So this might be a time to revisit that because you get an ad extra year to pay it back. And you could take $100,000 versus $50,000. Now, you’re really hurting your long term retirement.

Tony Shore
Because you’re gonna have to work the rest of your life!

Daniel Wendol
But you’re not investing in the stock market either. Like you said, you’re selling at the bottom here and that money is not working for you.

Tony Shore
And you’re losing the compounded interest.

Daniel Wendol
You’re losing compounded interest, but you’re also paying off a 20% credit card!

Tony Shore
Yeah, that’s true, oh boy, this is the time to look at that.

Daniel Wendol
So if the conversation switches from let’s do a tricky Roth conversion to instead consolidating debts. Pay off some of these high interest, loans and debts, and use this early withdrawal to do that, and then pay back that withdraw over three years. Maybe this is a chance for people to reset their debt situation. That’s much more interesting. Less exciting, less focus on retirement planning. Those are the conversations that I’d rather have. But, again, it’s not as sexy to talk about that compared to doing some sort of Roth recharacterization.

Tony Shore
Good point. Well, before we end the show, is there anything else you want to touch on? Regarding this?

Daniel Wendol
I think, I think people need to really think about this CARES Act and understand it. Make sure that you’re taking advantage of it, if it applies to you. If you’re not hurting, and you still want to use some of the new changes, I will talk to you about that. I’m just cautioning you to make sure that you’re comfortable knowing that at some point, you may have to justify this and say, Hey, you know, I did this because I was affected by the virus, you have to be able to self attest to that. Just be cautious. I am helping clients talk about debt reduction consolidation using these new strategies that are available. The 10% rule is gone. RMDS are skipped. Take advantage of it, use it if you can, and just don’t go overboard.

Thanks for listening to Dolphin Financial Radio based in the Clearwater, Tampa area.