How the CARES Act Helps Retirees

By Rebecca Lake

In an effort to quell some of the financial fallout created by the coronavirus pandemic, the federal government passed a $2 trillion stimulus package known as the Coronavirus Aid, Relief and Economic Security (CARES) Act. The act extends a number of benefits to retirees and pre-retirees. If you’re retired or you were planning to retire just before the coronavirus crisis hit, it’s helpful to know what the act means for your financial outlook.

If you invested money in a 401(k), traditional IRA, SEP IRA or SIMPLE IRA during your working years, then required minimum distributions (RMDs) are something you have to plan for in retirement. RMDs are specific amounts of money you’re required to take out of your qualified plans each year, based on your account value and life expectancy. If you fail to take your RMDs on time, the IRS can hit you with a steep tax penalty.

Previously, RMDs were required once you reached age 70 1/2. At the end of 2019, the federal government opted to raise the age threshold for RMDs to 72 through the SECURE Act. For 2020, however, RMDs have been suspended in light of the havoc the coronavirus crisis is wreaking on people’s finances and in the markets. That applies to accounts you own, as well as accounts you inherited from someone else.

That’s a good thing if you’re retired and you were poised to begin taking required minimum distributions this year. With the markets down, you may have experienced significant losses in your retirement portfolio. Having to take an RMD would essentially lock in those losses. But since you’re no longer required to take minimum distributions for this year at least, you may be able to gain back some of your losses once the market begins to turn around.

The CARES Act also includes provisions regarding Medicare and Medicaid that may impact retirees directly and indirectly.

First, if you’re on Medicare and have Part D coverage you can receive a three-month supply of medications when refills are allowed. This can keep you from having to visit the pharmacy as often and potentially exposing yourself to people who may be sick with the coronavirus.

Next, the CARES Act allows for the expansion of certain services under Medicaid, including mental health services, as well as directing more money toward programs designed to aid seniors with things like caregiving and paying basic expenses. Part of the act also directs more money to the Centers for Medicare and Medicaid Services to help improve safety and health conditions at nursing homes and assisted living facilities.

If you’re still working in retirement, even if it’s on a part-time basis or as a side hustle, you have more time to contribute money to your IRAs for this year. With the tax deadline pushed to July 15, 2020, you also have a longer window to contribute money to a traditional or Roth IRA, up to the annual contribution limits. For 2019, the regular contribution limit is $6,000 but you can contribute up to $7,000 if you’re over 50.

Remember, to make IRA contributions you need to have earned income for the year. And under the SECURE Act, there’s no longer an age limit on making contributions to traditional IRAs for 2020 and beyond. Previously, you weren’t able to make new contributions to a traditional IRA if you were over age 70 1/2.

Health Savings Accounts (HSAs) aren’t primarily designed to be retirement savings accounts but they can be a useful supplement to retirement income when covering healthcare expenses. These accounts, which associated with high deductible health plans, allow for tax-deductible contributions and tax-free growth.

Ordinarily, HSA withdrawals are tax-free when withdrawals are used to pay for qualified medical expenses. The CARES Act expands the definition of qualified medical expenses to include over-the-counter medications and health aids, something that wasn’t previously allowed. You can now also use HSA funds to pay for telehealth and remote care services if you’re getting medical care without leaving home.

If you need to use HSA funds for something other than healthcare in retirement, there’s one rule to know. Any withdrawals made before age 65 for things other than health are subject to both income tax and a 20% tax penalty. If you’re over 65, you can use the money in your HSA for any purpose, though you will pay income tax on withdrawals that aren’t used for qualified medical expenses.

A key part of the CARES Act centers on the payment of stimulus checks to eligible taxpayers to help provide financial assistance for those who may be struggling. The good news is that you may be able to receive a stimulus check if you’re already receiving Social Security retirement or disability benefits.

The guidelines for receiving a stimulus payment are based on income. Individual tax filers who earned $75,000 or less in 2019 (or 2018 if you haven’t filed your return yet) can receive $1,200 through the act. If you’re married and file a joint return your stimulus check could double to $2,400, assuming you earned $150,000 or less for the year.

There is a phaseout range for these payments, though you may not have to worry about that if you’re living on less in retirement. For single filers, the phaseout limit is $99,000 and for married couples, it’s $198,000.

In addition to these benefits for retired people, the CARES Act also contains provisions for people still saving for retirement.

Normally, the Internal Revenue Service imposes a 10% tax in addition to an individual’s income tax rate on early distributions from 401(k), 403(b), employee stock ownership plans (ESOPs) and simplified employee pensions (SEPs). The CARES Act waives this penalty in the case of certain distributions.

This benefit is for individuals who have contracted COVID-19; have a spouse or dependent who has contracted the virus; or who have been financially impacted. The financial impact may include a hindered income-earning ability or having to stay home to care for a child whose daycare facility was closed. Individuals may self-certify their qualified status for this benefit.

Note that these distributions are capped at $100,000 and must be distributed during 2020. You will still receive a 1099-R and be taxed at your normal income tax rate. The CARES Act does provide individuals a chance to avoid the premature tax liability through a three-year window to fully or partially repay their distribution, or recontribute the distribution to the plan.

Finally, remember that just because you can take an early distribution, doesn’t mean you should. Taking money from your retirement account hurts your ability to hit your retirement goals – especially if it means you miss out on the stock market’s eventual recovery.

The CARES Act extends relief to qualified individuals in the form of 401(k) participant loans (for those plans that feature them). Instead of the normal cap of the lesser of $50,000 or 50% of the participant’s vested balance, that’s now doubled to the lesser of $100,000 or 100%.

The increase is temporary – it will only remain available for loans initiated by Sept. 23, 2020. For those qualified individuals who initiated a loan prior to March 27, the date the CARES Act was passed, there is still an election available to suspend repayments on your existing loan through Dec. 31, 2020.

The CARES Act could provide some much-needed financial relief to retirees in a number of ways, including suspended RMDs and new rules surrounding medicare and medicaid. There are also some benefits to people who are still saving for retirement. Knowing what benefits you could reap from the act can help you better shape your financial plan for getting through the current crisis.

• A financial advisor can help you create a steady retirement income that supports you even in a tough economy. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
• If you’re retired but haven’t started taking Social Security benefits yet, consider the pros and cons of delaying benefits versus taking them early. You can begin receiving benefits at age 62, but waiting until age 70 could increase your benefit amount to 132% of what you’d normally receive. Running the numbers can help you decide whether it makes sense to take Social Security now if you need an additional income stream or wait a little longer.
• If you’re still saving and want to know whether you’re on track for a secure retirement, check out our retirement calculator.

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