posted by: Radnor Financial Advisors
As we continue to parse through the recently passed CARES Act (Coronavirus Aid, Relief and Economic Security Act), our hope is to separate the full Act into separate sections and review some of the planning elements. As with most financial and tax provisions, there is not a clear right or wrong path forward. Most often, one needs to take a moment and review their full financial picture and find the right path forward to maximize after-tax return and benefit. Often, this path is created by the sum of various actions as compared to a singular action point.
In today’s post, we are reviewing the new provisions around IRA distributions. As we begin, we note that under traditional rules, IRAs are intended to provide income for retirees (those over the age of 59 ½) and constitute taxable income at the time of distribution (required to start at age 72 (previously age 70 ½). While we note that some taxpayers may have basis within their IRA account and also may have ROTH IRA account balances, we are not focusing our discussion on these aspects at this time.
A few key changes within the CARES Act:
As we review, we also note that some taxpayers traditionally use their IRA RMD as a source for federal and state income tax withholding and may forego the use of estimated quarterly tax payments. Naturally, a decreased or avoided RMD will have an impact on your tax payment planning and may require the use of estimated payments.
Further, recent tax law provisions allowing an IRA Direct to Charity transfer has become an important planning tool. Given higher standard deduction amounts in recent years, the use of the IRA Direct to Charity has gained in popularity as taxpayers may not receive the full tax benefit from charitable transfers claimed as itemized deductions. Again, a change to IRA RMD levels may have an impact on charitable giving planning.
As we review these provisions, we note that the primary purpose of the CARES Act, or so one would think, is to provide flexibility for affected taxpayers to gain access to their retirement accounts in this time of need without undue penalty or cost. However, taxpayers likely have various sources of potential funds to access, of which a Traditional IRA may only be one, and proper planning should be used to create an ordering system as to which lever to pull from first.
It is our belief that maximizing the after tax return or value of the distribution is likely the driving factor in this equation. A few things to note as you consider if foregoing or reducing your otherwise normal IRA RMD level makes the most sense in your planning.
In short, the CARES Act provides many planning challenges and opportunities with regard to your IRA. As with most financial and tax planning discussions, there is no right answer for all taxpayers or situations. We strongly recommend that you meet with a certified financial planner and tax professional to discuss what is the best path forward.
Author: Carl Rosenfeld, CPA, CFP®Important Disclosure Information