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Written by: Mychal Eagleson, CFP®, AIF®, ChSNC® & Tom Farrer, CFP®, CRPC®
With news of the Coronavirus crisis, and the steps being taken to lessen the economic impact, still a daily feature in our lives, we're working hard to decipher the information and let you know as clearly as possible what it means for you as teachers and your families. As we've mentioned previously, the Centers for Disease Control and your doctor’s orders regarding your specific situation are your best source of advice regarding your personal health.
In terms of your financial health, today we're providing a summary of the most important personal provisions that are contained in the CARES Act, or as it's become known, the COVID-19 Stimulus Bill. There are many provisions that have been included and a lot of hype that's come along with them, and we wanted to take the opportunity to provide you with timely and accurate information on them.
Direct Support to Individuals (aka Stimulus Checks)
This is the provision you've likely heard the most about, but may have also heard the most misleading information regarding. It is exactly what it sounds like, the federal government will be sending money directly to individual citizens.
- Americans are eligible to receive "Economic Impact Payments" of $1,200 per adult, plus $500 for each child. These payments will be phased out for higher-income earners, starting at $75,000 in annual income for individuals/$150,000 in annual income for couples.
What It Means for You:
1. As long as you're below the annual income limits, you can expect to receive the full payment amounts. For the average family of four, that totals $3,400. If you're above the annual income limits, there's still a possibility you'll receive a partial payment amount, as long as your annual income is less than $99,000 as an individual or $198,000 as a couple.
2. You most likely DO NOT need to take any action to receive these payments. If you've already filed your 2019 tax return, the IRS will use that information to determine your eligibility and payment amount. If you haven't filed for 2019 yet, that's okay and they'll use the information from your 2018 tax return to determine your eligibility and payment amount.
3. There is currently no official timeline for when you will receive these funds either through direct deposit as a check. It's been a moving target since the bill was signed, with lots of rumors in the news and political posturing from those in the current administration. The best place to check, when guidance is released, is on the office IRS web page here: Economic Impact Payment Information Center
4. The IRS will keep you in the know regarding your payment by sending a letter to your last known address within 15 days of sending your payment. The IRS will not make phone calls, house visits, or use any other contact method regarding these payments and will not request information directly from you. If you receive anything other than a letter or they ask for personal information, it's a scam!
There's a small portion of the population the IRS will need to collect information from to send out these payments, but they have not released guidance on this yet. Based on past experience, we believe they will find a way to obtain the information they need without direct contact, likely through a voluntary form on irs.gov.
5. There are no strings attached to this money. Once you receive it, you're free to do whatever you want to with it. The idea behind these payments is to stimulate the economy through direct consumer spending. So, if you're going through a difficult financial time right now, make sure to spend it on the essentials you need.
However, if you're doing okay and have the cushion, then take the opportunity to get ahead. A few good options to consider are:
1. Make sure you have an emergency fund of at least $1,000. If you’re already there, try and double it to $2,000 using the money you would have used to make your loan payments.
2. Start a Roth IRA. Generally, these are a fantastic choice for young teachers and those who are in one of the first three tax brackets (10%, 12%, 22%) for a variety of reasons. Plus, with the US stock market down 25% right now, you’ll likely be investing at an attractive entry point (buying low). You can check out the full details on Roth IRAs in a 2-minute video here: Why a Roth IRA is a Teacher's Best Financial Friend
3. Start or increase your contribution to your child's 529 college savings plan. If you're an Indiana resident and contribute to the Indiana 529 plan, you'll be eligible for a 20% state tax credit, capped at $1,000 on up to $5,000 in annual contributions. Talk about making the most of your stimulus funds, adding 20% to it to reduce your state taxes is quite a deal. Even if you don't live in Indiana, your state may offer its own college savings incentive to you.
4. Do a combination of #1-3 or use the funds to pursue another financially beneficial endeavor. Whether that means having the money to use towards a will, donating some of the extra to your favorite charity or religious institution, or finally stocking up your vacation fund.
If you're not sure what to do, feel free to contact us. We'll be happy to discuss the different options, how they fit into your overall financial picture, and help you decide which is the best for you and your family.
Temporary Prohibition of Foreclosures and Evictions
If you're reading this, you can likely be placed in one of two camps; homeowner or renter. Thankfully, the CARES Act provides relief, regardless of which of these two camps you fall into.
- Forbearance up to a total of 360 days on payments toward a federally backed mortgage loan.
- Loan service providers must grant the forbearance once requested by the borrower without requiring any additional documentation. In addition, the initial period may be extended another 180 days upon request.
- No fees, penalties, or interest beyond the original amounts can accrue during the forbearance period.
- The service provider is prohibited from initiating a foreclosure for at least a 60-day period that began on March 18, 2020.
- 120-days of eviction relief for those that rent federally backed housing.
- In a similar fashion as for homeowners, your landlord cannot charge additional fees, penalties, or other changers during the 120-day period.
What It Means for You:
1. If you're unable to make your mortgage payment, or it looks like it's headed that way, you should call your lender and request the forbearance. For mortgages, a forbearance is a special agreement between you and your lender to delay the foreclosure process. It will not get you off the hook for your missed payments, but will buy you time to stay in your house and the chance to catch up later.
This provision is only applicable to federally-backed mortgages, so if your loan was purchased by Fannie Mae, Freddie Mac, insured by HUD, VA, or USDA, or your loan was made directly by the USDA.
2. If you're unable to make your rent payment, your landlord cannot, as of the date of this writing, currently evict you. Based on the CARES Act, you cannot be served an eviction notice until July 25, 2020 and the notice MUST provide 30 days to vacate the property. This buys you time to stay where you are and the chance to catch up by this summer, depending on your landlord.
3. These two provisions are not a panacea but are in place to ensure you are not left without a place as you navigate the stress and complications of this crisis.
Waiver of Early Withdrawal Penalties
Generally, taking an early withdrawal from a retirement account is a bad idea from a planning standpoint, and the IRS concurs because they assess a 10% penalty and taxes on those withdrawals. But, desperate times call for desperate measures, so the CARES Act has opened this option up to help struggling families.
- The CARES Act waives the 10% early withdrawal penalty for distributions up to $100,000 from qualified retirement accounts for those affected by the virus. Further, the income tax due on those distributions can be spread over three years, and investors have three years to return the funds to a qualified account.
What It Means for You:
1. If you're struggling because your income has dropped or you've been laid off, but you have a large balance in your 403(b) plan, or your spouse has one in his or her 401(k) plan, you may be able to take a distribution from either plan, up to an aggregate amount of $100,000, to help you get through these times. The provision is optional, but we don't believe many plan administrators will deny these distributions requests.
2. Qualifying to take the distribution requires that you have been diagnosed with COVID-19 by a test approved by the CDC, your spouse or dependent has been diagnosed with COVID-19 as such, or you've experienced an adverse financial consequence as a result of being quarantined, furloughed, laid off, or having work hours reduced due to COVID-19. You'll likely be asked to self-certify to one or more of these requirements when requesting the distribution and your plan administrator has the option to require additional verification or deny the request outright, if they already have contradictory information regarding your situation.
3. Generally, early distributions are not permitted in these plans without a qualifying reason, and when they are, the taxes and penalty make it a costly move. However, with the penalty waived through December 31, 2020 and the ability to pay the taxes on what you receive over three years, or repay the account over three years to avoid the taxes, it makes this a viable emergency option.
4. We still recommend only tapping a retirement account as a last resort, especially with the plethora of other provisions that are being enacted to help working families survive, but if you have to take this option, we'd recommend coming up with a plan first on how to deal with the potential payback feature, taxes that may need to be paid, and also to see how detrimental of an impact this decision may have on your ability to retire comfortably down the road.
5. This may present a substantial opportunity for you to rescue your money from a bad 403(b) plan and roll it over to an IRA with lower fees and better options. We're currently working with a group of experts on the matter, and our interpretation is that as long as you qualify by being affected by COVID-19 medically or financially, you should qualify, which would allow you to take the distribution and then pay it back to an IRA. This option is still developing and we plan to update it, but it presents a substantial planning opportunity for teachers. Talk about making the best of a bad situation!
Temporary Waiver for Required Minimum Distributions (RMDs)
If you know a retired teacher in their 70's or older, this provision was designed specifically for them. Usually, those people over age 72 are required to make a distribution annually from their pre-tax retirement accounts, which opens the money that's distributed to taxation.
- The CARES Act also will help retirees keep their savings in their retirement accounts. It includes a temporary waiver for required minimum distributions, which applies to both 2020 RMDs and RMDs due by April 1 for individuals who turned 70 1/2 last year.
What It Means for You:
1. If you, a loved one, or anyone else you know were planning to take an RMD this year, you can go ahead and scratch it off of the to-do list. Keep that money in its retirement account and save on paying taxes for another year!
2. There is additional good news, if you took your RMD already, and it occurred less than 60 days ago, you may be able to roll the distribution back into your IRA by counting the transaction as a 60-day rollover.
3. Since RMDs amounts are calculated based on an individual's account balance on December 31st of the prior year, given last year's stock market run up and this year's large drop, this waiver prevents a "larger than normal" RMD from reducing your retirement savings disproportionately.
4. If you're outside of your 70's, you may have inherited an IRA from a loved on in the past and are currently taking RMDs on that account. But guess what? This waiver of RMDs applies to your inherited IRA too, so save yourself some takes and keep that money tax sheltered for another year.
Incentives for Charitable Giving
Here's a quick history lesson... the Tax Cuts and Jobs Act (TCJA) which passed into law in December 2017 significantly increased the standard deduction that can be claimed on your income taxes, almost doubling previous levels for single and joint filers. As a result, most taxpayers today (almost 90%) are better off claiming the standard deduction and because of that, when it comes to charitable contributions, they're no longer tax deductible.
- Taxpayers will be able to deduct up to $300 of cash contributions regardless of whether they itemize deductions and the limits on charitable deductions for those who do itemize will be increased.
What It Means for You:
1. This is a little bit of relief in order to encourage charitable donations in this time of great need. Whether you donate now, have already donated in 2020, or are an ongoing donor, you'll be able to count your donations for this deduction.
2. Some conditions apply, the main one being that this deduction is only available for CASH contribution. Property donations do not count, so trips to drop off items at Goodwill or the Salvation Army, though important, will not help you here.
3. You'll need to check to make sure the organization you're donating to is a 501(c)(3) public charity or one of a certain type of foundations. If you donate to an organization that doesn't meet these specifications, you won't be able to take this deduction. In particular since they've grown so much in popularity, donor-advised funds (DAFs) do not count as they are not technically charities.
4. The tax benefit of this deduction is limited and you can figure it out by multiplying the value of your donation, up to the $300 limit, and multiplying it by your effective federal tax rate. For example, a $300 qualifying donation if you have a 20% effective tax rate will yield you a $60 tax savings for 2020.
Thanks for taking a few minutes to read up on the important personal provisions of the CARES Act and how they may affect you. We hope you're able to benefit from one or more of the items you've read and that you stay healthy and safe during this time. This is still an evolving situation and we plan to update this piece if more information becomes available, so please feel free to bookmark this article, check back every few days, and share it with the teachers you think it might help.
Before you go, we’d value the opportunity to have a conversation with you to discuss your financial planning, how the provisions of this bill may affect you, and generally how you can make the most of your finances. Right now may be the best time to examine your situation and plan for what’s ahead.
Mychal Eagleson, CFP®, AIF®, ChSNC® is the President of An Exceptional Life Financial, an independent financial planning firm specializing in finance for teachers. His passion is helping teachers plan for successful financial futures and he frequently writes and speaks on important financial topics and how they specifically affect teachers' personal finances. He serves on the board of the Financial Planning Association of Greater Indiana as the President-Elect and Co-Director of Programming, serves as a member of the Professional Advisory Leadership Council for the Central Indiana Community Foundation, and is a proud member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network. To read more of the articles he's written or been quoted in through national publications, or to learn about An Exceptional Life Financial please visit: www.anexceptionallifefinancial.com.
Tom Farrer, CFP®, CRPC® is a Financial Planner with An Exceptional Life Financial, an independent financial planning firm specializing in finance for teachers. He served for six years as an executive at the Indiana Public Retirement System (INPRS), Indiana's largest pension plan and the one that specifically covers teachers' retirement. His passion for working with individuals one-on-one to achieve their goals motivated him to earn the CERTIFIED FINANCIAL PLANNER™ designation in late 2019, and join An Exceptional Life Financial in 2020. He's a proud member of the Financial Planning Association of Greater Indiana, the National Association of Personal Financial Advisors (NAPFA), and the XY Planning Network and serves on the board of the Shepherd's Center of Hamilton County.