Who is affected by the CARES Act?

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, or the "CARES Act," provides relief to individuals, families, small businesses, and major employers.  The bill also puts measures into place designed to help the healthcare industry, as well as other sectors affected by the outbreak of the virus.  With such an expansive bill, it will likely change (hopefully positively) every American, either directly or indirectly.

How does the CARES Act of 2020 compare to the American Recovery and Reinvestment Act of 2009?

The cost of the CARES Act is estimated at roughly two trillion dollars, making it one of the most extensive stimulus packages in history. By comparison, the American Recovery and Reinvestment Act of 2009was estimated at $831 Billion.  The following March 26, 2020, Los Angeles Times article on the topic by Sandhya Kambhampati provides some additional comparisons and breakdown of the deals, which you can view here.

What do Strong Valley clients need to know?

Waiver of Minimum Distribution Rules

An exemption may exist during the calendar year 2020 for many, who would typically be required to take minimum distributions from their retirement plans and accounts.  We encourage our clients to discuss with their Strong Valley advisor, waiver qualifications, and whether this is something of which they should take advantage, within the context of an overall strategy and situation.

Increased Allowances for Charitable Donations

A part of the CARES Act stimulus is designed to encourage giving to charitable organizations during 2020. Significant economic downturns may lead to decreased donations to non-profits, as churches, food pantries, and other organizations become more heavily relied upon.  For those who itemize their deductions, there is no longer a 50% individual limit based on adjusted gross income. For those who do not itemize, cash contributions of up to $300 may be deducted.  And, for corporations, charitable giving limitations increased from 10-percent to 25 percent of taxable income.

Waiver of 10% Early Withdrawal Penalty

After January 1, 2020, withdrawals of up to $100,000 from qualified retirement accounts may be eligible for a waiver of the standard early withdrawal penalty. While withdrawals would still be considered income, the taxes on the distribution can be spread out over three years. Funds can also be redeposited to the account (re-contributed) any time within three years from the date of distribution, without the worry of the typical annual contribution cap limits.   

According to the provision in the bill (now Section 2103), a "coronavirus-related distribution" applies, as one would expect, to any individual (or their spouse) who is diagnosed with COVID-19 "or to" those who "experience financial consequences" related to the virus (i.e., layoffs, reduction of hours, the inability to work, etc.).

Where can I obtain more details?

Summary from the Senate Committee on Finance

Strong Valley has provided a more detailed overview directly from the Senate Committee on Finance, which can be found here. (Please note that some of the section numbers may have changed since the bill was passed and signed.)

Complete Senate Bill S.3548

The full text of the Senate bill, including amendments, can be found online at this link from Congress.gov.

Your Strong Valley Advisor

Strong Valley advisors are contacting clients as needed, but if you have any questions or concerns about how the CARES Act may affect your situation, please reach out directly to your advisor or call our main office at 559-384-2900.

Quick Links

Original Full Summary from the Senate Committee on Finance

https://strongvalley.com/wp-content/uploads/2020/03/CARES-Act-Section-by-Section-Tax-Unemployment-Insurance.pdf

Los Angeles Times Article comparing the CARES Act vs. the 2009 Stimulus package

https://www.latimes.com/politics/story/2020-03-26/coronavirus-stimulus-package-versus-recovery-act

The Senate Bill Text

https://www.congress.gov/bill/116th-congress/senate-bill/3548/text

The SECURE Act has wide-reaching impact

The “Setting Every Community Up for Retirement Security Act”, or SECURE Act, was signed into law on December 20^th, after passing with bipartisan support (97% of the house, and 71% of the senate).  Whether you are an employee with a 401(k) or a small business owner providing retirement benefit to employees, the SECURE Act will likely have an impact on your retirement planning and options.  Below are just some of the highlights.

Required Minimum Distributions (RMDs) Age

We regularly encounter questions about the current age of 70½ for required minimum distributions (RMDs).  The age, which may see somewhat arbitrary, and can be confusing to calculate when planning several retirement related decisions.  The SECURE Act changes the RMD age to 72 which pushes the timeline further back and makes things a bit easier when it comes to calculating key retirement events.

No More “Stretch IRA” Benefits

Stretch IRAs are normal IRA accounts that employ a strategy that allowed investors to pass the IRA down to future (non-spouse) generations and affording those beneficiaries with a means of deferring taxes and achieving tax-free growth. They are called “stretch” IRAs because they could allow a young person inheriting the IRA to “stretch” out distributions over several decades. 

With the SECURE Act those options and strategies are no longer available. Under the new law non-spouse beneficiaries must disbursements within 10 years (from the original account holder’s date of death) instead of allowing the beneficiary to take disbursements over their entire lifetime.

New Options for Business Owners and Their Employees

According to Callan Institute’s report on 2019 defined contribution trends, less than 10% of employer retirement benefit plans offer any sort of annuities or lifetime income options. Based on reporting from the Center for Retirement Research at Boston College, annuities typically have more complicated legal requirements and higher fee structures which makes them riskier for small business owners. 

With the Secure Act now passed and signed into law, offering annuities may be of benefit to employees who prefer them, while reducing the overall risk of business owners being sued if the annuity should fail for some reason.  Strong Valley can provide more information on why your business may (or may not) want to include annuities as part of the income solutions offered to your employees.  Strong Valley can also provide information that may be helpful to employees in understanding whether annuities make sense for their retirement at all.

Multiple Employer Plans

Another aspect of the SECURE Act are new tax credits and potential cost savings for small businesses by allowing business owners to pool together to offer employees a retirement plan. These are called Multiple Employer Plans (MEPs) and they can reduce the administrative burden and costs associated with operating the retirement plans. Strong Valley works closely with business owners and has experience working with and managing small business retirement plans and can provide more information to business owners who want to strengthen their business and retirement options by extending retirement benefits to their employees.

Part-time Employee Access to Benefits

One of the other new changes to come from the Secure Act is providing access to retirement benefits for long-term part-time employees (those who work over 1000 hours per year, or for more than 500 hours over the past three years). 

Of course, there are many more details of the SECURE Act, and there are many reasons for small business owners to offer retirement benefits to their employees.  Strong Valley has experience in providing guidance and plan support for small business owners. With the passage of the SECURE Act, it may be a good time for our business clients schedule a meeting to review new options available.

Summary

There are some advantages and disadvantages to the SECURE Act.  On the upside there are many advantages for small businesses owners who want to begin offering retirement benefits, and more options for those already offering retirement plans to their employees.

For individual and private investors, the most important thing to know is that the biggest tax implication is not for the original account holder, but for those who will be inheriting the IRA account in the future.  For those who have been planning to use the Stretch IRA provisions, be sure to work with your advisor in making the necessary shifts in strategy for your specific situation.

This article isn’t about the latest tech gadgets, travel destinations, or the latest “must-have” item for the holidays. The article focuses on prioritizing things that are truly priceless, like the gift of time. Time can mean both the time spent together or even taking the time to think more deeply about the sentiment behind the gift.

The cliché “it’s not the gift, but the thought that counts”, but how much time do we really spend putting thought into gifts that go beyond just a “wow” experience?  The article covers some of the economic numbers behind typical gift-giving, such as the number of returns and wasted dollars that are spent from giving the “wrong” gifts.

The article also talks about some of the concerns when giving sentimental gifts that often lead consumers to “take the safe route” and stick with superficial gifts. There isn’t a whole lot in the article to provide direct strategies for sentimental giving, but just enough to start a new thought process when considering gift ideas for friends, family and business associates this year.

The important thing is to think about how a gift might be used to enhance the recipient’s life, perhaps deepening the relationship they have with their spouse, with yourself, or with others in general.  There are countless task providers in the gig-economy that can be hired to make their lives easier or to make your own life easier so you can commit to spending more time with those you love. 

Another interesting idea from the article is that people tend to believe that “things” last longer than experiences. However, one of the quoted studies shows that experiences can cause feelings of happiness that outlast the happiness we feel from material things.

Depending on the person, it a big “wow” experience, like jetting off on a luxury vacation may not be the most meaningful. Sometimes just good quality down-time having lunch or coffee with a close friend may be more impactful.  With social media, we are often able to connect with old friends that we may not often see in person. A trip to just catch-up face to face might be a great gift to give to the friend, or for a spouse to travel and spend time with their friend.

What’s on your gift-giving list this year? We’d love to hear what you come up with, or hear stories about the gifts you have received in the past that are the most meaningful to you.

Why Use Securities for Charitable Giving?

Using securities instead of cash can provide more benefits to both the charity and the donor.  In fact, stock donations may represent 20% more financial value to the charity. This means that donors can give more money to the charity by donating securities instead of selling the same stock in order to make a cash donation, or worst of all just writing a check.   And donors may also benefit from additional tax benefits and capital gains savings over charitable giving of cash alone.

There are some basic rules and guidelines, such as having held the appreciating stock for more than a year and ensuring that the transaction is received by the charity (not just started) by the end of the calendar year.  Donors may be worried about the complexity, but the process can be much easier than donors may think.  There are even donor-advised funds (DAF) that can allow you to make your contribution now in the current tax year, even if you haven’t yet decided on which charities to give to.

As your financial advisor, we can also help you decide which securities will make the most sense to donate. For example, selecting stocks as part of rebalancing your portfolio, or making a shift in your overall strategic investments.  If you are considering charitable giving, now is the time to start those discussions so you can make the right decisions ahead of any end-of-year rush.

Tax-loss Selling & Capital Gains Reduction

Bottom-line financial performance for the year may often be less about earning more, and more about the ability to save and keep what you earn.  One of the ways Strong Valley helps clients achieve better financial performance is by looking for opportunities to maximize savings and mitigating the tax burden and potential penalties from capital gains.

We look for tax losses within your security portfolio and replace those losses with equivalent security for at least 30 days. This allows you to record the loss for tax purposes while keeping your portfolio performance relatively unchanged. Up to $3,000 per year can then be written off towards earned income while keeping the rest for future tax years.

One capital gains example includes monitoring mutual funds in client accounts to see when those funds pay gains and determining if those gains are appropriate for the client’s situation. If not, then we can avoid unnecessary capital gains by selling the fund and moving to equivalent security for a short period before repurchasing the fund.

Maxing Out 401(k) / 403(b)’s For End-of-Year Contributions

We recently wrote another article about the new contribution limits for 2020 that covers some of the concepts and elements of maximizing your retirement contributions. In addition to maximizing any employer contributed matching, you may also want to make additional “catch-up” contributions to ensure that you take advantage of the total allowable savings deductions for the entire year.  Of course, we will work closely with you to make sure those investments are allocated correctly, and to help you make decisions in line with your specific circumstances.

Business Profit Sharing Programs

If a business has a good year it may make sense to defer additional income by building up cash to prepare for a possible profit-sharing contribution plan.  This is a completely discretionary decision, but it is one that could put more into your retirement account, and less into the hands of Uncle Sam.  Profit-sharing plans can also be a great benefit for attracting and retaining employees – especially as unemployment numbers change and hiring becomes more competitive.  Strong Valley can help business owners understand the options for structuring and maintaining a profit-sharing plan that can provide the most flexibility for your specific business.  And probably, more importantly, provide advice on how to avoid some of the common pitfalls that can occur when a plan isn’t tailored correctly for your specific business and situation.

The “In Brief” bullet points cover just some of the highlights about the new compensation limits. There are other factors and regulations that may impact how these new limits apply to you specifically. Some of the factors include whether your compensation plan might fall under the “key employee” definition, or if you are a highly compensated employee. Your marital status, or the recent death of a spouse, and several other life situations may also impact your contribution limits, or at the very least potentially impact your savings strategy.

Most employees should probably be taking advantage of employer matching funds, and the amount that you choose to invest is called your elective deferrals – it does not include any contributions that your employer makes as part of the matching benefit (or even outside of the matching benefit). Essentially any contributions made on your behalf by your employer would be non-elective. The overall contributions would include both elective and non-elective contributions.

Of course, how much you should invest in your employee retirement benefit plan should be determined by creating an overall retirement strategy, and that may include additional investment and savings strategies to meet your specific financial goals and needs.

We provided the link to the IRS information for the sake of completeness and for reference, but the government has managed to pack a significant amount of complexity into a relatively short document. Strong Valley clients should contact us directly to discuss how the new limits apply in your specific situation, and in the context of your retirement strategy.