Market Commentary: Spring 2020 - The CARES Act

Apr 15, 2020 Willow Creek Wealth Management Posted in Articles, Market Commentary


The following is a summary of major provisions of the Coronavirus Aid, Relief, and Economic Security “CARES” Act. The Act is a complex piece of legislation and it covers many areas; our focus will be on how it impacts individuals. We would welcome speaking to you about it and if it might assist you and your family members. The CARES Act is massive with its direct cost estimated at $2.2 trillion and is equivalent to about 10% of U.S. GDP (the 2008 TARP "bail-out" during the Great Recession was $700 billion). The goal of this package is to provide emergency relief and put cash directly into the hands of Americans.

Cash Payments

Individuals who had up to $75,000 in adjusted gross income (AGI) in 2019 will receive a one-time payment of $1,200; married couples with an AGI up to $150,000 will get $2,400. Additionally, taxpayers will receive an additional $500 for each child under 17. Those with income above these thresholds will see their relief payments reduced by $50 for every $1,000 in AGI. This cash benefit will not be taxable. Notably, while the initial distributions will be based on your 2019 return (or 2018 if you did not yet file), the payments will ultimately be “trued” up in the following tax year if it is found your income was impacted by the downturn. Thus, while you will not receive any benefit in 2020 (when you most likely need it), you could receive one in 2021. And, even more surprisingly, if you ended up making more than the threshold levels in 2020, you will not have to return the rebate. On the planning side, if you made under the thresholds in 2018 but not in 2019, you might want to delay filing your tax return for as late as possible. Or if the opposite happened – you made less in 2019 – you might want to get that return in as soon as possible.

Coronavirus-Related Distributions

The government is also loosening up regulations surrounding distributions taken from qualified retirement plans. If you are impacted by the Coronavirus in a broad number of ways, including if you or a family member have the disease or experience adverse financial consequences from it, then you can take advantage of the following tax benefits:

  • Exempt from the 10% Penalty. Individuals under the age of 59 ½ may access retirement funds without the normal 10% penalty.
  • Eligible to be Repaid Over 3 Years. Beginning on the day after an individual receives a Coronavirus-Related Distribution (CRD), they have up to 3 years to roll back any portion of the distribution into a retirement account. Furthermore, such repayment can be made via a single rollover, or multiple partial rollovers over a 3-year period. Finally, if distributions are rolled back using this option, an amended return can be filed to claim a refund of any tax paid attributable to the rolled over amount.
  • Income May Be Spread Over 3 Years. By default, the income from a CRD is split evenly over 2020, 2021, and 2022. A taxpayer can, however, elect to include all of the income from a Coronavirus-Related Distribution in their 2020 income (this might be a smart move if your income is lower than normal this year).

Retirement Plan Loans

Many employer-sponsored retirement plans offer participants the option of taking a loan from their retirement assets. For individuals who have been impacted by the coronavirus (using the same definition as outlined above for CRDs), the CARES Act enhances the ‘regular’ loan rules in the following three ways:

  • Maximum loan amount is increased from $50,000 to $100,000.
  • 100% of the vested balance may be used – this used to be limited to 50%.
  • Repayments owed on the loan can be delayed up to one year.

Required Minimum Distributions Waived in 2020

All required minimum distributions (RMDs) are waived in 2020 – i.e., you are not required to take them this year. This relief applies to a broad range of qualified accounts including IRAs, beneficiary IRAs, SEP IRAs, Simple IRAs, 401(k)s, 403(b)s and 457(b) plans. And, this is not a deferral. On top of that, if you have delayed your 2019 first time RMD payment, that one is waived as well. If you've already taken your 2020 RMD, the Act may allow you to return it if it is unwanted. Please note, however, that if you have a Beneficiary IRA, and you have already taken your RMD for the year, you are not allowed to roll it back into the account. Speak with your advisor to determine your eligibility and if it makes sense to defer or roll back into your IRA.

A Few Other Things to Know

  • Small Business Relief. The Paycheck Protection Program, offered through the Small Business Administration (SBA), is a partially forgivable loan program offered to businesses with less than 500 employees, including sole proprietorships. Loans must be applied for by June 30, 2020. In addition to this program, the SBA is offering Economic Injury Disaster Loans, including a $10,000 grant (distributed within 3-days of a successful application; does not have to be repaid) and up to $2mm low interest loan that can be extended up to a 30-year term. Repayment terms are done on a case by case basis. Refer to our 4/7/20 blog post for more details.
  • Student Loans. There will be an automatic suspension of federally held student loans through September 30, 2020. The interest on these loans will also be suspended during that time. Privately held student loans are excluded.
  • Charitable Giving Incentives. Allows non-itemizers a total charitable contribution of up to $300 and removes the AGI cap for those who do itemize. These contributions have restrictions: they must be in cash and must go directly to the charity - not through a Donor Advised Fund.
  • Qualified Charitable Donations. Donations made directly from an IRA to a qualified charity are still allowed; the donation is not tax deductible but you will not owe taxes on the amount donated.