The coronavirus has upended all aspects of people’s lives, from their jobs to their finances to their relationships. Despite the economic and social turmoil, there is some good news for people with the capacity to save for retirement right now. The federal government has pushed back deadlines for taxes and individual retirement accounts (IRAs) to help the economy and allow taxpayers to focus on other expenses.
In March, as much of the United States enacted stay-at-home orders and businesses began shutting down, the Trump administration announced that the tax deadline would be moved from April 15 to July 15. The date corresponds with a previous announcement that many tax payments also would be deferred to July 15.
Additionally, the IRS has waived minimum distributions and extended the deadline for contributing to your IRA to July 15.
What does this mean for your retirement? Most importantly, it gives Americans another three months to make a 2019 contribution to their IRA—no penalties will be assessed for contributions made during the extension. While contributions can now be made until the middle of 2020, they will be considered contributions toward the 2019 taxable year.
The new deadline automatically applies to all individual taxpayers and corporations—you don’t need to apply for a tax filing extension or fill out extra paperwork for a 2019 IRA contribution before July 15.
Contribution Limits and the New Deadline
The deadline has been moved, but the limits on how much an individual can contribute to their IRA account has not changed. For people younger than 50, the contribution limit for 2019 and 2020 is $6,000. For those age 50 and older, the limit is $7,000.
There are several reasons to take advantage of the extended deadline to contribute to your IRA.
If you were not able to save enough money to meet the limit by the April 15 deadline, you now have more time to save up for a larger contribution. Additionally, the recent market decline could make it a good time to invest, as your IRA will grow, tax-free, when the market rebounds.
If you do plan to make a contribution before the new deadline, in the interest of caution some financial advisors are recommending that you note “2019” on your check so that it’s clear what year the contribution should apply.
Other Ways to Take Advantage of the Extended Deadline
The new July 15 deadline also applies to health savings account (HSA) contributions. That means you can continue making tax-deductible contributions to your 2019 HSA through July 15. Money spent from your HSA on qualified medical costs also will not be taxed.
If you owe taxes, July 15 is also now the deadline for making tax payments that were due on April 15. On July 16, penalties and interest on unpaid balances will begin accruing.
Getting a Refund?
If you believe you’ll receive a tax refund, don’t put off filing. There’s no need to delay your receipt of that money in your account.
Special Rules for Required Minimum Distributions
For 2020, the federal government also has waived required minimum distributions (RMDs) for IRAs and 401(k)s and other qualifying employer retirement plans. This waiver applies to all RMDs due on April 1 and December 31 for retirement plans that you own or have inherited.
If you’ve already taken out RMDs in 2020, they are eligible for a 60-day indirect rollover. If you choose this option, the money will be deposited back in your IRA as if you’d never taken the distribution. The IRS also is offering an option under COVID-19 rules that could allow you up to three years to repay the distribution or report it as income.
Here are some ways to take advantage of these special rules.
If you don’t need cash, don’t take an RMD. This way, you can avoid paying taxes on the RMD and will keep the money in your retirement account, where it will continue to grow tax-free.
If you do need cash because you’ve been diagnosed with COVID-19 or you’ve been laid off due to the pandemic, you can take the withdrawal without penalty. The rules allow a withdrawal from a qualified IRA or 401(k) up to $100,000 without paying the 10% penalty charged to people age 59 ½ or younger.
Consider Switching to a Roth IRA
Here’s one more potential benefit of this unprecedented financial time.
Stock values have dropped dramatically, offering additional opportunities to increase your retirement savings over the long term. One option is to convert your traditional IRA to a Roth IRA. The money you move from the IRA to a Roth account will become taxable, but the (likely) lower value of the assets you shift will mean you’ll pay less in taxes than you will after the market rebounds. And after you keep the Roth IRA for five years and reach age 59 ½, you can make tax-free withdrawals from the account forever.