The ultimate goal of the CARES Act is to provide a dose of stability in uncertain times. It’s more important than ever to work with a financial advisor to ensure your wealth plan remains on track.
April 13, 2020
The effects of COVID-19 have been far-reaching, reverberating throughout the economy and reshaping the daily lives of nearly every American. In response, in late March President Donald Trump signed into law the largest relief package in U.S. history – the Coronavirus Aid, Relief and Economic Security (CARES) Act.
“It’s designed to help 90 percent of the U.S. population,” says Angie O’Leary, head of wealth planning at RBC Wealth Management–U.S. “And if you look at their extended families, it should help nearly 100 percent of the population.”
The legislation provides a series of provisions to assist Americans who’ve found themselves economically affected by the spread of the virus. Several of those provisions will impact high-net-worth individuals (HNWIs) and their families.
Here’s a breakdown of some of the CARES Act provisions:
The inverse, says Ringham, are changes to the way individuals leverage their qualified retirement savings plans to get them through this potentially economically destabilizing time. “The government has relaxed the rules on how to get money out of your 401(k) without being completely penalized from a taxation perspective,” he says.
With the coronavirus relief package, individuals will be able to pull up to $100,000 from their vested qualified retirement accounts as either a penalty-free disbursement or a loan to pay for expenses and disrupted income related to the pandemic.
“The great thing about that distribution is you can take the income (at once or) over three years … you have to pay taxes on it or you have to pay it back, but you’re given three years to pay it back,” O’Leary says, adding that the payments can be in excess of the normal contribution limits for those three years.
O’Leary points out that for individuals tapping into their retirement accounts, there are some wealth and tax planning considerations. “If this is the year you have a really low income because of a disruption, you might want to pay it all back (as part of your 2020 taxes) because you’re going to be in a lower tax bracket,” she says.
In an effort to enhance and incentivize charitable giving during the COVID-19 pandemic, the CARES Act has made a few changes to deductions surrounding giving, including:
Ringham says the legislation is unprecedented and creates an opportunity for HNWIs to give a significant amount to charities this year in a tax-efficient way. “Never before have we been able to offset 100 percent of one’s AGI through charitable deductions. It’s always been limited by 50, or more recently 60, percent of AGI,” he says. “This is a way for nonprofit entities to get money from people and benefit others.”
The ultimate goal of the CARES Act is to provide a dose of stability in an uncertain time. As HNWIs and families navigate the new economic reality and the corresponding market turbulence, Ringham says it’s more important than ever to work with a financial advisor to ensure your wealth plan remains on track.
For some people, that may mean looking at your current goals and readjusting. For others, it’s about re-positioning portfolios and strategies to continue growth within the current market. “We’re looking at whether you are still meeting your retirement goals and objectives. Do we need to tweak the plan or has it really changed that much even if the market has changed?” says Ringham. “All the way to what opportunities does this present that we should be considering to take advantage of now?”
The act also creates a conversation point for parents to talk with their adult children about what this package means for them and how it could fit within the wider family legacy. “These are conversation starters,” adds Ringham. “And we’re getting plenty of time to talk to each other these days.”
This article was originally published on April 13, 2020.
RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in consultation with your independent tax or legal advisor.
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