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Transcript from Scott Bishop’s Presentation on The CARES Act and Retirement AccountsHosted by Tom Dickson, Founder of The Financial Experts NetworkAbout Financial Experts Network: Tom Dickson has hosted over 300 national webinars over 10 years that have drawn over 135,000 financial advisors. 90% of the attendees surveyed responded that that learned ideas and strategies from Tom’s webinars that will help them better serve their clients. Financial Experts webinars have featured thought-leaders like Michael Finke, Harold Evensky, Bob Keebler, Larry Kotlikoff, Jeff Rattiner, Mark Kantrowitz and Kurt Czarnowski. As a bonus, many Financial Experts webinars provide CE credit for financial advisors who hold the following designations: CFP, RICP, CLU and ChFC.TRANSCRIPT (The transcript has been edited to highlight key concepts of the CARES Act as it relates to retirement accounts. Welcome: My name is Tom Dickson. I'm pleased that everybody can join me for About Scott Bishop: Scott is an Executive Vice President at STA wealth management based in Houston, Texas that manages about $2 billion in client monies. Scott and his team oversee $700 million of the $2 bn. What's interesting to me when I look at Scott's background is his very deep tax background, which allows him to bring a holistic comprehensive approach to financial planning work that he does for his clients. And relevant to the topic today, Scott is a longtime member of Ed Slott’s Master Elite IRA advisor group. Scott Bishop: So here are the four areas I'm going to talk about today. Retirement plan and IRA distributions: I am going to skip the retirement plan side. But just like with 401 K's, you can take the money from an IRA without 10% penalty. One thing that Ed Slott always says is the “I” in Ira means individual, which means that you have a lot more flexibility with your IRAs, and you do with 401(k). There's no plan document, so you have complete access to do it. One thing we all know, with IRAs as financial advisors that everyone has to wait till after 59 and a half to avoid the 10% penalty, unless you do things like 72 t distributions, which I recommend being very careful with those. I've done them in the past, but they're difficult. But with the CARES Act, we can access up to $100,000 of money from IRA without having it be subject to the 10% penalty if you're under the age of 59 1/2. NOTE: Any distributions are taxable. It is not tax free. It is just avoiding the penalty and it will create a 1099-R for reporting on your tax return.3 Options for Taxation Planning of Distributions: You have three choices on taking money out of the IRA. You could pay the full taxes in 2020. Most people like deferring, but let's say you did get laid off in March, and you have no income for the rest of the year. This may be a good year from a tax standpoint to take that income. It’s best to consult with your CPA to identify the best option. Pay over 3 year: If you want to split it over three years, it's a one-time election. You will make that choice upon filing for 2020 tax year and get 1/3 of 1099-R amount each year for three years. You can't say well, I'll do it all in year two. It's a third, a third, a third. Repay (rollover) by end of 3rd Year: With this option, you would avoid any taxation, but you would have to amend prior year’s tax returns (not a red flag). Many of you have probably heard of the 60-day rule. It's basically expanding that into a three-year rule that anytime within the three year period ending, if I did my math, right, December 31 2022, you can pay back at any time that money back into your IRA. If you do that, say in the year 2022, though, then you're going to have to go back and amend any tax returns that you reported that income and so if you didn't 2022, you're also going to have to go back and amend your 20 and or 21 tax return. And you would get a just a 1040 x it's not a big red flag, nothing to worry about. But to be able to get the refund. You must pay the tax along the way. You cannot say well, I'm going to repay in 2022 and not recorded on your tax return. That would not be something you would be able to do. Warning: Beware the ability to take $100k out of your IRA and 401k accounts – first you need to have been impacted by COVID-19 to avoid pre-59 ? 10% penalty and to defer taxes (or repay) in 3 years. Four Misconceptions about Coronavirus Related Distributions (CRD):Everyone is Eligible: To be eligible for a CRD, you must have been impacted by COVID Directly and prove under audit:You or your spouse/dependents were diagnosed with COVID-19 (Test)You experienced ”adverse financial consequences” on account ofQuarantineFurloughed or laid off (hours reduced)Closing or reduced hours of businessNote: May have further guidancePlans Must Allow CRDs: If for a Plan (like a 401k plan), your plan must be already allowed or amended to allow for CRDsCRD’s Are Tax Free: They are PENALTY Free even under 59 ? (no 10%), but not tax free unless repaid. Tip: BEWARE Bracket CREEP -- These can also cause “bracket creep” and “Stealth Taxes” – phase outs, Medicare Premiums, etc.Any RMD Can Be Paid Back: If you took your RMD before February 1st, it cannot be paid back (rolled over). Only ones through Feb 1 and May 15 (have until July 15 to roll back to IRA)Scott’s Slide: CARES Act and RMDsFor those over age 70 ? (or 72 via the SECURE Act), you are required to take RMDs based on the prior year 12/31 account value. You can defer your first RMD until April 1st of the following year (but then you typically have two RMDs). However, under the CARES Act:NO RMDs are Required…Even for those that deferred their first year and were required to take two this year.If you took your RMD (other than for Inherited IRAs that are not legible for rollover with one exception), you can do a 60 Day Rollover. If eligible, you can rollover your RMD, you will avoid taxation.Eligibility: If you took your RMD between Feb1 and May 15, you have until July 15, 2020 to complete the rollover.Warning: You are only eligible for ONE 60-Day rollover every 365 days. If you have taken one during that time, you may not be eligible for a rollover. There may be additional IRS guidance.Scott’s comments on slide above: There's never an exception for required minimum distribution unless Congress statutorily allows you to not to do it. I think the last time I saw it was in Houston at least was during Hurricane Harvey, where they have the disaster relief programs. And they kind of keep plugging it in. So, everybody after age 70.5 we know must take it RMD for certain people that I have not reached there yet, of course, with the SECURE act, it is gone to age 72. And that distribution as most of you already know, it is calculated based on your December 31 balance. Each RMD would stand on its own. So, a 401k would have its own RMD. an IRA has its own RMD. And typically, when you do a rollover, if you're after age 72 from a 401k to an IRA, if you had passed that point already, you have to do an RMD for that year before it rolls over. So a lot of people if they got displaced, this is actually a pretty good year, you don't have to worry about the RMDs even if you rollover from a 401k to an IRA because this is a year where we don't need it. So bottom line, no one needs to take it. No RMDs are required. If you took it, you could get it back in based on what we just talked about. An inherited IRA is something that also must take required minimum distributions, an inherited IRA cannot be rolled over. So, if you took an inherited IRA RMD, already, after February 15, you have the ability, typically to roll it back but not from an inherited IRA. If you have an inherited IRA, and you have not taken the RMD, yet, you do not need to take one this year. So, for inherited IRAs, or IRAs, you must take it out, you do not have to take an RMD. But you cannot roll it over with one exception. So as always, with taxes is one exception. If you were a younger spouse, and you're your spouse passed away, and because you were under age 59 and a half, let's say you were 54 years old, you took it as an inherited IRA, so you could avoid the 10% distributions. And you were taking RMDs and you already took win this year in that timeframe, you can actually as a spouse with an inherited IRA, you can actually roll over that RMD not back into the inherited IRA, because that's not allowed, but you can roll it over into your own IRA. Because remember, for spouses, if you are under age 59 and a half, many times, it's a good thing to create an inherited IRA to have access to it. But unlike anybody else, you have the ability after age 59 and a half to put it into your own IRA. As a spousal rollover. It is kind of a deferred spousal rollover. Tip: One caveat always and this is not exempted under the cares act. If you say took a distribution from an IRA on November 1 of last year, you must wait 365 days to do a rollover. Even though this is extended, it is under the same rules as the 60-day rollover, and you'll only get one every 365 days. It's a common misconception that it's once a calendar year, but it's once every 365 days. So be careful with that one. Qualified charitable distributions. If you guys haven't investigated this, investigate it, that's a QCD, a qualified charitable distribution. One of the benefits of qualified charitable distributions is that can satisfy both your legacy and charitable giving and satisfy the RMD. Why do you like QCDs? Well, with QCDs, first off, you must be over age 70 and a half. By the way, that is not an age to change. With the SECURE Act. The QCD was still 70 and a half. So even if you aren't required to do an RMD, you can still do a qualified charitable distribution. So, what happens if you take money out of your IRA, and you give it directly from the IRA custodian directly to a 501 c three charity, it can't go to a donor advised fund. It can't go to a private foundation. It must go directly to public 501c (3) charity, it is not deductible on your tax return, but it is non-taxable distribution. So, if you took out up to $100,000 from your IRA and gave it directly to one or more charities, it is a non-taxable event to you. And the charity, of course doesn't have to pay taxes. But what are the benefits of doing a qualified charitable distribution number one, up to whatever your RMD is for the year it satisfies that. Number two, unlike taking money out of an IRA for an RMD, an RMD hits your tax return, which affects phase outs of different itemized deductions impacts, Medicare premium levels, all those types of things that are bad on your tax term. Sometimes we call those stealth taxes. If you do a direct, qualified charitable distribution to charity, it is not a taxable event. It does not have a tax return impact. It doesn't show up anywhere. And it's nice because if you don't report on your tax return, it means it's invisible as to who the charitable beneficiaries you are. That's one of the reasons I like things like Donor Advised funds, it keeps some of your charitable giving off your tax return, which I'm a big fan of. But now the question is, since one of the main benefits of a qualified charitable distribution is to satisfy the RMD, can you still do it this year? Should you still do it this year? The first question is, can you Yes, should you if you do have a charitable intent for anywhere from $1,000 to $100,000, it's still a great place to take money out of to give to charity for all those reasons I talked about on a tax return, that it's tax free, and it's also turning something that would have been ordinary income and giving it to a charity tax free. Many people advise their clients to give low basis stock to charity, or even to Donor Advised funds in those cases, but that's just eliminating capital gains. This is eliminating ordinary income and even ancillary benefit also that if you did do that qualified charitable distribution, and actually We'll most likely reduce the what would have been your value of your IRA at the end of December 31 2020. So, we'll reduce the calculation of what your RMD will be for in the year 2021. If we're required to make an RMD in 2021. So, is it allowed? Yes, it is still something to consider.TAX planning considerations.If it is good tax planning and you are eligible, consider rolling over your RMD to save on taxes. Again, this is not a deferral, it is not owed. You will owe one (under current law) for 2021 based on your 12/31/2020 balance (that may be higher)Depending on other issues, if your RMD was $30,000 consider a Roth Conversion – especially if you think the market will go higher. The “recovery” of your account will grow tax free…but you will owe taxes on conversion (see Roth Strategies in my Coronavirus Resource Center)Meet with your CPA in the 4th Quarter to review any year-end tax planning related to how you want to account for any loans, distributions, rollovers, etc. Pro-active tax planning is SMART Planning!Scott’s Comments: Bottom line, you need to look and see what the impacts are of any of these types of things. And you really want to make sure that you talk with your CPA about it. Again, whether you're going to do it, consider rolling over your RMD all these types of things should be looking at it because if you roll back in your RMD, it means your IRA will most likely higher and therefore be a more expensive RMD next year. So, if your income was interrupted and you have a low tax year this year. Don't just do it, your CPA is not filing tax returns right now most likely because of the deferral of all the tax filings until July 15, 2020. So now may be a great time to sit down with your CPA and do a pro forma 2019, 2020 tax return to see what you should do. Again, if you decide to roll that back in and your income still low this year, another planning consideration is to consider doing a Roth conversion. So, if you would have had a $30,000 RMD, and you roll it back in, maybe a better idea might be if it still makes sense tax wise to convert that same $30,000 into a Roth IRA. And if you think the stock market's going to go up from this point, the growth of that Roth IRA conversion will be tax free forever, you will owe the tax on the conversion, but it may be really smart tax planning. And as I kind of alluded to before, if you don't do it now, it'll be a great time to sit down with your tax and financial planning team to see what you should do to maximize the benefits and do proper tax planning for 2019, 2020, and 2021. ................
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