Ep 22: CARES Act Part 1—Individuals
The X's & O's
Today is the first part of our conversation on the CARES Act. Brent, Matthew, and Joshua discuss how this new bill impacts individuals specifically and the potential benefits you can receive.
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The Hosts:
Brent Pasqua, Matthew Theal and Joshua Winterswyk
Transcript:
Brent Pasqua: This is the Retirement Plan Playbook. I am Brent Pasqua and I’m here with Matthew Theal and Joshua Winterswyk. We are podcasting quarantine-style from our homes today. Josh and I are podcasting from our homes in Ranch Cucamonga and Matthew is in Los Angeles and this is episode 22. Today we’re going to talk about the CARES ACT and how the CARES ACT affects individuals. And for anyone who doesn’t know, the CARES Act stands for the Coronavirus Aid Relief and Economic Security Act. It is a relief package they created for individuals to really help them get through this difficult time financially that many people are going through. I guess really the first question I have, Josh, for this CARES ACT is, who’s actually going to be receiving this money?
Joshua Winterswyk: That’s a great question. I think that’s the most popular question I’ve been getting too, is who’s getting the cash payments. Really 90% of taxpayers will be receiving a one time cash payment. And depending on if your tax return, you filed individual, that one time cash payment could be as high as $1,200 and if you’re married filing jointly, it can be as high as $2,400. And then there’s also some other provisions in there that if you have children under the age of 17, you’ll get an additional $500 per child. And this is in the form of a tax rebate, but it’s essentially free money if you qualify.
Matthew Theal: Yeah. Who doesn’t love free money? One frequently asked question that I’ve got a lot is if you’re just on social security, if you get a check, and from my understanding from everything I’ve read, that’s it. Yes. Is that what you guys have heard as well?
Joshua Winterswyk: Yeah, I’ve heard that too. You’re still going to get a check and it doesn’t even matter if you filed a tax return for the seniors or retirees, you still potentially are going to get a check as well.
Brent Pasqua: What does it mean that it comes in a form of a rebate?
Joshua Winterswyk: Well, really the public can look at it. If you do qualify, you’re just going to get that actual cash payment into your bank account. But let me give like a real life example. Let’s say that you don’t qualify because there is some income limitations, but you do lose your job this year and your income is going to allow you to qualify at the end of the year. Then that amount will be repaid to you in the form of a tax credit at the end of the year, so you will still receive the benefit of this stimulus. So that’s the way they’re structuring that cash payment is in the form of a tax credit.
Matthew Theal: It’s disappointing they did it this way. They should’ve just sent money to everybody that would solve that issue. You’re talking about Josh?
Joshua Winterswyk: Yeah, I think that it is an issue because as we’ve already talked about, someone who doesn’t qualify because their income was too high in 2018 or 2019 that’s reported and lost their job. They can make the argument that they needed the money more now than ever or more than someone who actually received it. So I think it can be looked at as unfair for those people who don’t qualify right now but potentially will at the end of the year.
Brent Pasqua: It doesn’t to me seemed like a lot of money that people are getting paid, especially if they lose their job and people have bills to pay and expenses. And is there a plan to have more money for individuals at this point or is this basically it?
Matthew Theal: I haven’t seen any plans floated to get more money to individuals. There’s been a lot of plans floated to get more money as a small business owner side, remember if you are unemployed, you still aren’t getting unemployment and that’s been expanded as well, which we’ll talk about later in the show. So really the idea with giving people essentially free money like this is they want to get it in your pocket and gets you spending, maybe you’ll buy a new MacBook, maybe you’ll buy some AirPods, whatever it is they want you stimulating the economy.
Brent Pasqua: So who is not going to get this money?
Matthew Theal: Yeah, so it’s actually unfortunately phased on income. So if you are what we call it, married filing jointly. So you’re married and you filed with your spouse. If your AGI is under 150,000 then you get a rebate. If it’s over, you actually get phased out. If you’re a head of the household, it’s 112,500 and if you’re a single filer, it’s 75,000 and that’s your adjusted gross income. And if you haven’t followed your 2019 return, it’s based on your 2018 return. Again, very disappointed. I did it this way with the phase out. Josh, I don’t remember off the top of my head, but let’s use married filing jointly as the example. Isn’t it like 19993 or something like that that people get phased out at where they ended up getting absolutely nothing
Joshua Winterswyk: Yeah. And there’s some good calculators. So I think you’re right about that amount. And there’s some calculators that you can put in your AGI and it will tell you how much you’ll actually be receiving. The discount on the adjusted gross income over the restriction or the phase out level is $5 for every $100 that you would go over. But again, just Google search stimulus paycheck calculator and put in your AGI and you’ll be able to pump out your number if you are questioning whether your income level is under the phase out or not.
Brent Pasqua: So what happens if somebody in 2018 was below these income levels and they get the stimulus, but this year they may over these levels are they going to have to pay it back in their capacity?
Joshua Winterswyk: To answer your question no. And a strategy that we’ve been reading about is if your income was lower or below that phase out threshold in 2018 and you expect your 2019 to be over the threshold, it might be beneficial for you to utilize that extended tax deadline and not file your 2019 taxes until you get your check. Because that 2019 when you file it, they’re not going to take away simulate this check if you already received it.
Brent Pasqua: So the thing that I keep wondering is if it’s going based on a lot of people’s 2018 tax returns, because most people haven’t filed their 2019 return slip the extension and people in 2018 had really good years. You know husband and wife are working, they’ve had joint income, they were over these thresholds and then by March of this year they lost their job. They’re hurting for money. What about those people?
Joshua Winterswyk: It might be a part of that 10% we were talking about unfortunately.
Matthew Theal: The one thing though I will say is when you do look at the unemployment numbers, it does seem like a lot of people who are losing their jobs today are in the service based industries, maybe they’re a waitress or waiter or busboy cook a retail worker and those are on the lower side of the pay scale. So all those people should be receiving this check in addition to their unemployment.
Brent Pasqua: That provides a lot of clarity. So what changes regarding the emergency distributions from a retirement accounts where part of this CARES ACT, Josh?
Joshua Winterswyk: So couple of big changes with this disaster or crisis that the CARES ACT actually taught or implemented was you could take out from your retirement accounts without the penalty. So that’s really big because there’s a 10% penalty if you take out from your retirement accounts. If you’re not 59 and a half or older, and this amount is up to a $100,000 that you can take out from your retirement accounts to help supplement. Obviously this hardship that we’re going through. You must have a reason though to take it out and to avoid that penalty, it must be diagnosed with COVID-19 or your spouse be diagnosed with COVID- 19. Also, if you are furloughed laid off reduced hours, you are a business owner and you’ve had reduced hours.
Joshua Winterswyk: So the actual reasons are pretty right. So if you are affected in any sort of way and needed to take out money from those retirement accounts without that penalty, most likely, if you were affected and seeing a loss of income, you’d qualify. Again the amount is still taxable if you take it out and it could be eligible to be repaid back into the accounts up to three years. It’s kind of like a 60 day roll over rule, but it’s a three year roll over rule. If you take it out, you have three years to actually pay that money back into the retirement account.
Brent Pasqua: At that point you would recover the amount of taxes that you’ve paid into it?
Joshua Winterswyk: Correct. Because all on that distribution you are going to pay taxes on that distribution in the year that you do take it out.
Matthew Theal: I’m not sure if I like this that much. I mean it’s nice for people who are hurting, but I think that if you have been impacted by COVID-19 or you did lose your job in some way, try and avoid this one as much as possible. I think there’s probably better options to get money. But like you said Josh, I mean this is still a taxable distribution and in a way you’re stealing from your future to help yourself now when there are hopefully going to be other measures to help people who are significantly hurting financially right now.
Joshua Winterswyk: I have to agree with you. I think this is a tread lightly when you’re looking at taking out from your retirement accounts, not only the tax implications, but then you’re also taking from the accounts that are invested and the market’s down. So you really have to be careful when you’re looking at taking out from retirement accounts and sacrificing that future. And again, there aren’t going to be people out there that absolutely have to and we understand that. But again, just make sure we do the right research and making sure that you taking it out is going to actually help your situation and benefit you because there are a lot of consequences to doing so.
Matthew Theal: Yeah. Like if you’re hurting financially, this is probably your last move. I mean, let’s say you have a mortgage and you’re planning on using this distribution to pay your mortgage, call the mortgage company. Tell them you’re not going to be able to make payments for three months until your job starts back up. Try and negotiate that way instead of taking the quick, easy route, which is stealing from your future.
Joshua Winterswyk: I agree.
Brent Pasqua: So in this CARES ACT, what changes or adjustments were made to employer plans?
Matthew Theal: Yes, actually, we were kind of knocking the last one obviously, but I like the employer plans changes a lot more. The increase the maximum loan you could take from 50,000 to a 100,000 and the nice thing about a loan at a 401K is you’re borrowing your own money. So you can repay it over time with your contributions or when you go to retire you just get that much less from a distribution. They also changed it. So 100% of your invested balance may be used. I believe previously Josh wasn’t there like a calculation you had to do-
Joshua Winterswyk: It was 50,000 and then 50% of your vested balance. Yeah, it was a two part calculation of how much you can actually loan from the 401k.
Matthew Theal: And then payments on the loan are delayed a year. So another nice feature there.
Joshua Winterswyk: A great solution if you’re looking to take money out for the short term instead of actually taking that distribution like we talked about in that last change.
Matthew Theal: Yeah, absolutely. I like this one. It’s better than the IRO one. Again, last resort type deal though, right?
Joshua Winterswyk: I agree. Yup.
Brent Pasqua: I know that there’s another big change in this ACT. What happened to the requirement on distributions. I think this is impacting a lot of people who are retired or who had inherited IRA money. Tell us a little bit about this, Josh.
Joshua Winterswyk: Yeah, so a lot changes with RMDs, it seems like over the last year, but the RMDs you required on distribution that the IRS mandates you to take out from those retirement accounts. And for 2020 they’re actually waving or suspending the RMD. So if you haven’t already taken out your RMD for 2020 or required minimum distribution, you will not be forced to in this year. And what this will do is just help keep money in your retirement account, not having to force a sale and a distribution and paying taxes on that account. Now that that account most likely has declined.
Joshua Winterswyk: So also first-timers. So if you haven’t taken your RMDs yet, and you are waiting till 2020 to take that RMD from 2019 that’s also suspended. So those people who fit into that gap, they’re actually missing two RMDs, which is actually pretty nice feature for them. With this change to this does include stretch IRAs or inherited IRA RMDS. I mean you get to suspend or waive this year’s RMD if you haven’t taken it already. And then that’s also for the five year rule. So if you’re on a five year distribution schedule for the retirement RMD payout this year will be ignored. So you’ll have that extended to a six year distribution payout.
Matthew Theal: This is a great role. I absolutely love this. I was pretty young in the industry in 2008 but Brent, you’re a seasoned bet so I know you went through in a … I know RMDs were hurting a lot of people because they were forced to take money out of low market prices, so this is incredible. I’m glad they’ve learned their lesson from them. Nothing else other than to say it than what a great rule.
Brent Pasqua: Yeah. I think really why those helps is because for those who don’t know, I mean right now it’d be a bad time to sell shares of stocks if you had two in your IRA to get your requirement and distribution out because on December 31st your required minimum distributions calculated and when they calculated last year at the end of the year, the distribution amounts that a person would have to take out this year, the market was so high that these distribution amounts that people are having to take out are high. And they get that amount of money out of your IRA would force you to sell a lot of stock. And a lot of people at this point, just want to hold all of their shares that they own, whether it’s in stocks and bonds and so forth, in order to allow the market to recover and come back up.
Brent Pasqua: So I think it is a very favorable rule for people and it’s very helpful. Some people, it may not impact that much, but it is a long-term benefit. I mean if you inherited an IRA, this is great. Just let the money continue to defer for another year and you don’t have to take it out. So I think like you said, Matthew, they did learn from 2008 and this a thing that I think they picked up on from last big decline. And I think this is very helpful for us.
Joshua Winterswyk: What happens if you lost your job, Matt?
Matthew Theal: Oh, so if you lost your job, the first thing that’s going to happen is the expanded unemployment insurance. So that they made it longer, they made the check size bigger and they expanded the eligibility. So massive win there. You will get… This is kind of cool and I believe, Joshua, correct me if I’m wrong, but the pandemic unemployment insurance, that’s for 1099 workers, people who normally wouldn’t qualify for unemployment are now qualified. So that’s huge, right? Uber drivers, Lyft drivers, TaskRabbit, it’s kind of that new 1099 economy is covered under this because though a lot of those people are hurting right now.
Joshua Winterswyk: I think that’s a good one. I was just going to confirm that. Yes, that’s correct. And just a great provision that was added.
Matthew Theal: And then also they cut the waiting period. So previously there’s a waiting period for unemployment. And the reason they did it this way is so people would be incentivized to go find a job fast if they were laid off, but they cut that payment down. And when you’re unemployed, when you apply, you’ll get a check that week or a backdated check, which is also really, really nice. Like I said, it’s going to be bigger. It’s been bumped up by $600 a week and we added four extra months of benefits. So really, really nice for people who are hurting. I’m sure this will get expanded more. It did in 2008 and I believe that it was what, almost two years of unemployment you got in 2008 I expect to see something like that again this time.
Brent Pasqua: So basically if people are out of their job, they’re going to be able to obviously get unemployment and they’re going to get the extra stimulus and the hope is that this rule carry them long enough for the economy to get back working, jobs to get back and then people to start making regular money again. This will allow them to continue to pay their bills?
Matthew Theal: Yeah.
Joshua Winterswyk: Yup.
Brent Pasqua: The other question I think that a lot of people have is what about all the student loans that are out there that are very difficult to pay right now?
Joshua Winterswyk: Yeah. Another part of the CARES ACT is a federal student loan payments are deferred. So there’ll be no required payments until September 30th, 2020. And also there’s going to be no interest of accrual during the interim. So you’re not going to actually see interest accruing crawling through that period of deferment. So just another benefit from the CARES ACT for people who do have federal student loans that don’t have the means to pay them in the short term, you can again defer those payments and are required to make a payment until September on there.
Brent Pasqua: One thing that I thought was important inside of there too is that the timeframe will still count for the loan forgiveness programs. So if you are enrolled in a loan forgiveness program on those deferment or that time from now until September will still count towards that program. Which is this is a pretty good benefit to that change. Any required payments are suspended, but voluntary payments can still be made. So if you still say, your goal is to pay down student loans and I do have the means to pay them, you can still pay them. They’re still allowing me to do voluntary payments.
Matthew Theal: Yeah. One thing on the loan forgiveness, I was reading, I don’t know if you read it this way to Josh, was actually if you are in a loan forgiveness program, your best plays to actually call and get payments stopped right now. Call your federal loan service provider, get the payments stop because in a way you don’t have to technically pay for these, what is this three or four months and you’re still going to get the forgiveness in your loan program. But this is a nice one for people who again are suffering right now because a kind of misunderstanding I hear right now is people saying, “Oh, the federal government is giving people student loans.” That’s not what happened here at all. It’s just a couple of months where you’re not making payments
Joshua Winterswyk: And not being charged interest, but yeah, no forgiveness in there.
Brent Pasqua: Finally, I believe there were some changes also to charitable contributions. What were some of those changes in that?
Matthew Theal: So they made again, a few changes here, this is going to be some tax lingo, but they added above the line charitable contributions. That unfortunate, I hear the limits only $300 I’m not really not sure why they did it this way. Josh, maybe you have something to add. It also must be made in cash and has to go to a 501(c)(3) organization. So you can’t use some of those fund backdoor charities that a lot of people do. 501(c)(3) is essentially what I would call a real charity. One nice thing is it is available for people who don’t itemize. I was kind of confused with this one. Wasn’t really sure what they were trying to accomplish. I don’t know Josh, if you have any different feelings?
Joshua Winterswyk: No, it’s not very much of a big benefit because I mean $300 for someone at a 12% tax bracket is only a savings of really dollars. And so for someone that’s in a very, very high tax bracket, even a 35% tax bracket at $300 the most they’d be saving is about $111. So there’s not too much of a benefit. I think the only one thing that I read in there that was nice is that they didn’t really have an end date to that provision. So potentially it stays on that tax return going forward for future years. So a little savings every year going forward, it’s going to be asked, but I just didn’t see a lot there. There was a lot of meet to that provision.
Matthew Theal: I wonder if they forgot a zero. And there’s a typo and that is, Oh no, it’s 300. But we really meant 3000 or something like that. But who knows.
Joshua Winterswyk: Right, right. Yeah, that one didn’t catch my eye, as big as the other ones did.
Brent Pasqua: Well, thank you for listening to the Retirement Planning Playbook. I’m Brent Pasqua here with Matthew Theal and Joshua Winterswyk. If you enjoyed our show and want more information, please go to the retirementplanplaybook.com for the show notes and for more detail. You can also leave us a review on our podcasts and if you are a business owner, please tune in to the next episode. We are going to discuss the CARES ACT and how it impacts business owners. Thank you for listening and we wish you a very safe and healthy great one. Talk to you soon.
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