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The rules governing your retirement accounts have been loosened in the year 2020. You have more time to put money in, can take money out early without penalty, and the required minimum distribution rules (RMD) for those 72 and older have been removed entirely.

July 15 Deadline for 2019 Contributions (Extended From April 15)  

July 15, 2020 is the deadline for making 2019 contributions to your IRA, Roth IRA, Health Savings Account (HSA) or Coverdell education savings account. It’s also the SEP IRA deadline for sole proprietors and independent contractors who file their income on schedule C with their personal tax return. The typical deadline for prior year contributions is April 15, but these were extended by the IRS in response to the pandemic, along with the extension of the personal tax return deadline. While you can extend your personal tax return deadline until October 15 with the filing of an extension request to the IRS (form 4868), you cannot extend the 2019 contributions to your IRA, Roth IRA, HSA or Coverdell past July 15. For those who are self-employed and want to contribute to a SEP IRA for 2019, you can extend that contribution deadline if your company return is also extended. For sole proprietors, the company deadline is your personal tax return deadline, which is now July 15, 2020, but can be extended to October 15, 2020.

IRA, SEP IRA, and HSA contributions are great last-minute tax savers. A self-employed person could generate more than $60,000 in tax deductions by maxing out SEP IRA and HSA contributions by July 15.  For example, a self-employed person who had $250,000 in self-employment income could contribute 25 percent of their income (the SEP IRA contribution rule) up to the maximum of $56,000. Because of their income, they would be able to contribute the maximum of $56,000. And, if they had a high deductible health plan (HDHP) in 2019, they could also contribute $7,000 (family amount, $3,500 if single) to their HSA. In the end they could generate $63,000 in last-minute tax deductions. Assuming the person is in a 35 percent federal and 10 percent state tax bracket, they would save over $28,000 in taxes by making these two last-minute contributions. They will also see their SEP IRA grow tax-deferred, and their HSA will grow and come out tax-free for medical expenses.

Related: ITR Filing and Tax-Saving Investment Deadlines Extended. Check the New Dates

Many self-employed persons with no employees opt for a solo 401(k) instead of a SEP IRA as it has more benefits, but the solo 401(k) must have been established back in 2019 to make 2019 contributions. The SEP IRA, on the other hand, has a major advantage to last-minute persons still making 2019 contributions as it can be set up and funded up until the 2019 deadline of July 15, 2020.  The 2019 contribution limits for the accounts you can still contribute to for 2019 are as follows….

COVID-19 Penalty-Free Distributions

The CARES Act gave us stimulus checks and PPP loans, but it also created penalty-free early distributions from IRAs and 401(k)s for those who are financially affected. These distributions can occur from 401(k)s, IRAs, SEP IRAs, Simple IRAs, pension plans, 457 plans and 403(b) plans. These COVID-19 distributions are exempt from the usual 10 percent early withdrawal penalty that would apply when taking funds from any of these plans before you turn 59½. Congress decided to unlock these funds and remove the penalty people would incur when accessing their own retirement savings.

To qualify for a COVID-19 distribution, the account owner must have experienced “adverse financial consequences” from the pandemic. This is a broad definition and one that the account owner self-reports and claims with their account administrator. Adverse financial consequences include being subject to a quarantine (most states have had shelter in place by now), being furloughed or laid off, having your business closed or negatively affected, or hours reduced or being unable to work due to childcare changes and availability (closed schools, closed childcare facilities). The rule also includes anyone who has been diagnosed with COVID-19 or whose spouse or dependent is diagnosed with the virus. The limit on penalty-free COVID-19 distributions is $100,000, and they can be taken up until December 31, 2020.

One additional perk to the COVID-19 distribution is that any tax due on the distribution can be spread over three tax years. This three-year rule helps ease the burden of the tax due from taking a distribution, as those amounts would otherwise be included entirely in your gross income in the year taken. However, if the distribution is a COVID-19 distribution, you can spread the income and tax liability over three years (2020, 2021 and 2022).

You are also allowed to return the funds to the same account or to an IRA of your choosing within the three years, and you can avoid the taxes owed and can get that money back into a tax favorable account for future investing. The IRS has issued guidance on how to recoup any taxes you may pay on the distribution if you return the funds in later years. For example, if you end up re-paying a 2020 COVID-19 distribution to an IRA in 2022, but already paid tax for 1/3 of it on your 2020 tax return and another 1/3 with your 2021 tax return, then you can amend your 2020 and 2021 returns to seek a return of the tax paid. The goal of Congress was to provide penalty-free access to those who needed it, while easing the tax due on the distribution and giving investors up to three years to get the money back in. It is a careful balancing act, but it is one Congress did an admirable job at when crafting the retirement account provisions found in the CARES Act.  

Zero Required Minimum Distributions in 2020

Individuals with IRAs, SEP IRA, 401(k)s and other employer plans are required to take certain required minimum distributions (“RMD”) from these accounts at age 72. The previous age limit was 70½, but this was increased to 72 beginning in 2020 courtesy of the SECURE Act, which was signed into law late last year. The good news for those 72 and older who must take RMD is that they are not required to do so for 2020. The rationale is that while the markets are low it would be unwise to force someone to sell their investments during the pandemic while their account values are low. The benefit to those 72 and older is that they skip RMD for 2020 if they want. They can keep their entire account invested and look to 2021 to sell and then take their annual RMD.

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There are strategic moves that can be made in 2020 given the favorable rules for retirement accounts found in the CARES Act and from executive action from the IRS. Whether it is tapping a 401(k) or IRA to help survive financially or whether you are looking to make late 2019 contributions for retirement, health or education savings accounts, the laws for 2020 give you more options and flexibility than we’ve had in years.



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