On March 27, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act in an effort to help the American public survive the financial fallout of the global pandemic. The price tag of the CARES Act is $2.3 trillion, which represents the largest-ever economic stimulus package in US history. Specifically, the financial aid package provides relief
to six different groups impacted by the pandemic. The list includes:

  • Individuals – $560 billion
  • Large Corporations – $500 billion
  • Small Businesses – $377 billion
  • State & Local Governments – $339.8 billion
  • Public Health – $153.5 billion
  • Education – $43.7 billion

Arguably, the most important aid in the $560 billion earmarked for individuals and families. Approximately $300 billion is being used to send cash payments to American taxpayers who make less than $75,000 (individual) or $150,000 (joint). The remaining $260 billion will be disbursed in the form of unemployment benefits over the course of the next several weeks.

In addition to providing financial relief in the form of cash payments, the CARES Act has relaxed the rules regarding tax-advantaged retirement accounts. The act makes it easier to withdraw funds while eliminating tax penalties. Let’s review the new withdrawal rules.

CARES Act Withdrawal Rules For Tax-Advantaged Accounts

The CARES Act has relaxed the withdrawal rules on all tax-advantaged accounts. The list includes 401(k), 403(b), 457, TSP, and Traditional IRA. However, the CARES Act legislation only applies to qualified participants with a valid COVID-19 related reason for early access to retirement funds. Simply put, COVID-19 must have personally affected your life in order to be eligible for the special withdrawal rules. Valid reasons include:

  • Being personally diagnosed with COVID-19
  • Spouse or dependent diagnosed with COVID-19
  • Experienced a layoff, furlough or reduction in work hours
  • Inability to work due to COVID-19
  • Lack of childcare because of COVID-19

If one (or more) of these reasons is applicable to your situation, you can take advantage of the special withdrawal rules. What are the special withdrawal rules? From a financial standpoint, the most favorable rule modification allows you to make an early withdrawal from your retirement account without paying the 10% penalty. Of course, this rule modification only benefits those who are younger than 59 ½. In addition to suspending the early withdrawal fee, the CARES Act is temporarily eliminating the mandatory 20% tax withholding requirement. Please remember that the withholding is not a tax. Instead, it’s an attempt by the IRS to ensure that you pay the required income tax on withdrawals from your retirement accounts.

In addition to the favorable withdrawal rules, the CARES Act provides extraordinary flexibility in terms of redepositing the withdrawn funds back into a retirement account. The legislation allows up to three years to replace the funds. If you restore the funds within three years, no taxes are owed until the funds are withdrawn upon retirement. Typically, withdrawn funds must be restored within 60 days. Therefore, three years is an incredibly generous offer.

Should I Invest My CARES Act Stimulus Check?

COVID-19 has basically shut down the global economy. Consequently, millions of jobs have been disrupted or permanently lost. Based on data provided by ADP, 20 million jobs were lost during the month of April. Our nation’s unemployment rate has increased dramatically during the past 60 days. The current rate is 15%. In January, prior to the outbreak of the virus, the US unemployment rate was 3.5%, the lowest level in 50 years. The coronavirus has wreaked havoc on the US economy.

Should you invest your CARES Act stimulus check? Ideally, investing your check or using the proceeds to make an IRA contribution would certainly be an excellent decision. Unfortunately, many people simply can’t afford to make any investments or IRA contributions due to lost wages. Many people are using stimulus funds to pay bills and cover living expenses. If possible, you may want to consider investing a small portion of the check. Making a partial investment (or IRA contribution) is certainly better than making no investment.

As an added incentive for investing your stimulus check, the stock market has generated a sharp decline during the past 90 days in response to the collapse in the US economy. Therefore, the stock market is “on-sale” in comparison to 90 days ago. Of course, just because the stock market is cheap does not mean that you should invest. It depends on several factors. These factors include your long-term investment strategy, your age, tolerance for risk, prior investment experience, and your current asset allocation. If you have questions concerning how the CARES Act could potentially alter your investment strategy, you might want to speak with a licensed investment professional.

Do you have questions about your long-term investment strategy? If so, you might consider meeting with a licensed investment professional. Angelica Roxas has been a licensed investment professional for almost 20 years. She is a financial strategist specializing in helping clients develop specific investment plans in regard to asset allocation, retirement solutions, and tax strategies. In addition to being President of Strategic Asset Preservation Inc, Angelica is also the Founder and President of South Bay Tax Solutions. She is an expert in helping her clients understand complicated financial matters. If you would like to meet with Angelica at no cost or obligation, she will be happy to review your financial situation. Angelica’s phone number is (424) 247-1120 or email at angelica@strategicassetpreservation.com. Visit us at: www.strategicassetpreservation.com.