You’ve likely seen several articles on the new stimulus package that was signed into law last week, but I thought it might be helpful to summarize the benefits that might apply to you, and provide some guidance on how to take advantage of them.
On March 27, 2020, the CARES Act was signed into law. This $2 trillion federal stimulus package is aimed at supporting individuals and businesses who are impacted financially by the COVID-19 pandemic. From checks in the mail for roughly 125 million Americans, to student loan payment relief, to expanded HSA and FSA eligible expenses, this stimulus package is chock full of ways to help people through the economic challenges triggered by the COVID-19 pandemic.
Here’s a summary of some of the most important benefits of the CARES Act for individuals, and how you can maximize the benefits available.
Stimulus Payments
The federal government is sending money (technically advanced refundable tax credits for 2020) to those who qualify based on their 2019 adjustable gross income (or 2018 AGI if you haven’t filed 2019 taxes yet). More than 80% of tax filers are expected to receive money through this program, which will likely show up in your mailbox or your bank account in late April or May.
Individuals with adjustable gross income (AGI) under $75,000 will receive a $1,200 check. If you file taxes jointly and your AGI is under $150,000, you’ll receive a $2,400 check. In addition, you’ll receive an additional $500 for each child under age 17 in your household.
But stimulus checks are phased out at higher income levels. Payments are reduced by $50 for every $1,000 of income above $75,000 ($150,000 for those who file jointly). Assuming you don’t have children, if you made more than $99,000 as a single filer (or $198,000 for joint filers) in 2018, you won’t get a check. And if you’re a joint filer with two kids, you won’t get a check if you made more than $218,000 in 2018.
Funds will be sent via direct deposit if the IRS has your bank info already from previous tax filing, or via check. If the IRS doesn’t have your direct deposit info, or has outdated information because you switched banks recently, they plan to set up a web-based portal soon where you can update your bank information. They’ll post updates here.
If you do get a stimulus payment, use it to cover expenses. If you don’t need it right away, put it into your Emergency Savings just in case you need it. And if your Emergency Savings is fully stocked and your income is secure, use the funds to invest towards retirement or pay down high interest debt.
Expanded Unemployment Benefits
Under the CARES Act, unemployment benefits now cover more people for a longer benefit period, at a higher payout, with no waiting period. And with a record 3.3 million unemployment claims in late March, these benefits will be critical for millions of people.
Unemployment benefits are now available for self-employed individuals who weren’t previously eligible. However, the state and federal governments are still sorting out details of administering the Pandemic Unemployment Assistance program that will cover self-employed individuals. If you’re looking to apply for benefits as a self-employed person, check your state’s unemployment site daily over the next week or so – hopefully access to benefits for you will be opened up soon.
The unemployment benefit period has been extended by 13 weeks, and the one week waiting period will be waived so recipients can access benefits more quickly.
Unemployment benefits will also be increased by $600 per week through the end of July 2020 which will more than double benefits for most recipients.
Federal Student Loan Payments on Pause
Federal student loan payments are automatically deferred through September 30, 2020. No interest will be charged during this period nor are any payments due. And, if you’re on a repayment plan or forgiveness program that requires a certain number of payments to be made until forgiveness is granted, the federal government WILL count the next six months as qualifying payments towards forgiveness, even though you don’t actually have to make any payments!
If you’re working towards loan forgiveness through a repayment or forgiveness program, make sure that you DON’T make any student loan payments until October 2020. Payments should be automatically paused, but it’s especially important for you that you double check. Instead of making student loan payments for the next six months, use those extra dollars to cover expenses, pad your Emergency Savings, pay down other high interest debt, or save towards retirement.
Expanded HSA/FSA Eligible Purchases
The CARES Act has expanded the list of eligible expenses that you can pay for using your HSA or FSA account. Over-the-counter medications have been added as eligible expenses as well as menstrual products.
Penalty-Free Retirement Account Withdrawals:
If you need to access funds in your IRA or employer-sponsored retirement plan due to the COVID-19 pandemic, you can now access up to $100,000 without incurring a 10% penalty even if you’re under 59 ½. You’ll still owe taxes on the withdrawal, but you can now spread the taxes from the withdrawal over the next three years, and you have the option to recontribute the funds as well.
There are also no required minimum distributions (RMDs) for any retirement accounts in 2020. If you’ve already taken an RMD and want to redeposit it, you can.
For employer-sponsored retirement plans like 401(k) and 403(b) accounts, you can now borrow up to $100,000 (previously $50,000), and you can borrow up to 100% of your vested balance (previously 50%). You can also delay repayment by up to one year.
If you are thinking about accessing retirement dollars, first consider using your Emergency Savings, unemployment benefits and stimulus money if you qualify, and putting bills on hold temporarily. Many lenders are willing to work with you right now. If you still need cash to make ends meet, consider using low interest debt like a home equity line of credit or personal loan. Your investment accounts have likely decreased in value over the last several weeks, so withdrawing retirement funds should be avoided if possible. If you do need to access retirement accounts, it’s good to know there won’t be any penalties. And generally borrowing from an employer-sponsored retirement plan may be a better option than taking a withdrawal from an IRA, but there are more considerations than I can address (without putting you to sleep). If you need help choosing between taking funds from Roth accounts, IRAs and employer-sponsored retirement accounts, reach out for help.
I hope this is helpful!