Take These Immediate Financial Steps In Response To COVID-19

May 12--What can people affected by COVID-19 do right now to maximize their opportunities from the CARES Act?

If you or your spouse has been financially impacted by COVID-19, the IRS has suspended penalties on early withdrawals from IRA accounts and employer-sponsored retirement plans for distributions up to $100,000. The distribution will still be subject to tax, but the IRS is allowing taxpayers to spread out recognition of the taxes in equal parts over the next three tax years.

If you take this distribution, you have the choice to recognize all the tax in 2020, which could be a smart play if you're going to be in a low income tax bracket for 2020, and you expect to move up to a higher bracket in 2021 and 2022. Even better, the IRS will let you repay the distribution back into the account over the next three years.

Are there opportunities for people who aren't financially impacted by COVID-19?

The deadline to contribute to IRA accounts has been extended to July 15, which allows more time to capture these valuable tax advantaged opportunities. The maximum allowable 2020 IRA contribution is $6,000. Eligible taxpayers who turn 50 years of age this year or older can also make a catch-up contribution of another $1,000, for a total of $7,000. The IRS has suspended the requirement to take the 2020 RMD (required minimum distribution) from IRAs or 401ks. This is good for retirees, who won't have to sell or withdraw money right now while the market is lower, thus lowering the current year tax bill. If you've already taken your 2020 RMD, you can redeposit the funds within 60 days of the distribution to reinvest the funds and avoid the taxes.

Should people consider Roth IRA contributions or conversions right now?

This is actually a great time to consider a Roth conversion. For example, if you have an IRA worth $50,000, which has dropped in value to $30,000 because of the recent market drops from coronavirus, this is an ideal time to convert the $30,000 IRA to a Roth IRA. First, if you anticipate a market recovery, your future growth will be all tax free rather than tax deferred.

This should lower your future tax bill by a much larger amount than the tax you may pay in the current year. Second, if you're like a lot of people, your income may have gone down this year because of the coronavirus impact, which means you may be able to convert your IRA at a lower tax bracket.

Are there any non-retirement planning opportunities people should consider right now?

For those still paying back student loans, the government has automatically suspended payments through Sept. 30. In addition, the interest rate on those loans has been temporarily set to 0%. If you are confident that you will keep your job, consider using these payments towards higher interest debt (since you don't need to make student loan payments right now, which may have a lower interest rate).

Or, use this as an opportunity to continue your payments to pay down your student loan balance since 100% of your payments will be applied to principal. Another opportunity is to take advantage of historically low interest rates. We are seeing lower interest rates on mortgages, automobiles, and even credit cards. Now is a great time to review your existing loans, such as your mortgage, for potential refinancing opportunities. If you have enough equity in your home, you may be able to consolidate some of your higher-interest rate debt with a "cash-out refinance," using proceeds from your low-interest rate mortgage to pay off high-interest rate debts, such as a credit card.

Paula Burkes, Business writer

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