Coronavirus: Retirement Account Changes #690

Kaaren Hall Blog Norris

This week’s radio show and video guest is Kaaren Hall alongside Bruce and Aaron Norris.  Kaaren is the CEO of uDirect IRA Services, and she’s also a board member at the Retirement Industry Trust Association. She’s here today to fill us in on what you can and can’t do with your retirement accounts at these interesting times. See below for full video and resources.   

Episode Highlights

  • What do the latest numbers show, especially the amount who filed for unemployment?
  • What does the Pandemic Unemployment Assistance involve, and when should we see that come into play?
  • Will people get a break on property taxes?
  • How does the CARES Act impact retirement accounts, including what you can and cannot do?
  • Are there limits to what your CRD can be used for?
  • Would the limit on the use of funds for CRDs also apply to 401Ks?
  • What is the going interest rate published by the IRS?

Episode Notes

Aaron Norris: Hey, everybody, it is April 10th. I only say the timeframe because this morning I woke up and there more headlines than I could technically update today, but we’ll have to wait until next week. Everything’s just moving so quickly. Thanks for all the great feedback we’ve been getting about the stuff that we’ve been putting out. I’m probably taking at least three to four-hour webinars every week on a lot of the stuff that keeps moving. So just stick with us. But just realize this was recorded at 8:00 a.m. on Friday morning, so we have enough time to get it out for the weekend. So, of course, there’s probably going to be changes by the time you’re listening to this later on.

Update on the numbers. Last week, another 6 million people nationwide filed for unemployment. It is just screaming.

Bruce Norris: Just put that in perspective. The all-time record before that for a one week gain was, I think it was 630,000 or 680. This is almost nine times that in one week.

Aaron Norris: Not great. So if you’ve been paying attention, Gavin Newsom several weeks ago put out the eviction moratorium. I can’t honestly say I knew that there wasn’t a judicial council in California and what they did. But on the sixth, they expanded upon Newsome’s eviction and foreclosure moratorium. So basically, we just can’t do much until the state of emergency is lifted by the state of California. And that starts a 90-day countdown of when evictions can proceed. Now, the order specifically states that judicial foreclosures can’t proceed. I did talk to attorney and his opinion was that a standard foreclosure could proceed. The problem is, are you going to run into problems with sheriffs and courts being willing to do that with everybody on the stay at home order? It’s just messy. The Apartment Owners Association and Dennis Block did a presentation on the 7th. If you’re watching this on YouTube, you’ll see the link on the screen. I’ve created a direct link to an hour and a half session? And this link on the screen, bit.ly/evictionstop, takes you directly in the video where Dennis Block talks about what the Judiciary Council does and what it means for our industry. I highly recommend it. You’ve got the Apartment Owners Association and the California Apartment Association doing a lot of great stuff around this.

Bruce Norris: I just want to make a comment. When we talk about judicial foreclosures in California, they’re almost are none. So that’s an interesting statement.

Aaron Norris: I don’t know what that means, but I think it was the attorney’s opinion that we could proceed with the standard foreclosure. But will the courts and the sheriffs abide by and help us get through the process? The answer is probably no.

Bruce Norris: I think the spirit of Newsom would be to stop foreclosures. Not one percent of foreclosures.

Aaron Norris: Let’s see, the pandemic unemployment assistance. We should start seeing California announce this week that people should start seeing the aid come out. This expands the unemployment up to 39 weeks for those impacted by COVID-19. If you’ve got tenants that have been impacted by COVID-19, it would behoove you to check out the California Association of Realtor forms and document it, if nothing else, to also help your tenants just start to document the process for themselves. They’re going to be able to get an additional six hundred dollars per week. I don’t know if they’re going to go retroactive. I wasn’t able to get clear on that. But it goes all the way back to March twenty-ninth and goes all the way through July.

So they said that they’re going to start sending it out starting, I don’t know if it’s this week or next week, but you can find out more information at edd.ca.gov.

I’ve heard a lot of real estate investors have raised their hands for this. Today, April 10th, is when 1099 contractors are going to be able to apply. So when Matt and Amanda did the session for us last week, it was clear that we could apply on behalf of things like our 1099 subcontractors and things like that. That changed almost right away. So now is their time to apply for these. I have not heard of anybody who got the $10,000, to be honest with you. So good luck with that. I don’t know how that’s going, but today is the day.

Property taxes. There’s been some talk about whether everybody is going to get a break on property taxes. And the answer is no. Newsome released a press release yesterday praising the counties for being willing to work with everybody. But this is what the county said. The County Association said taking care of California is our top priority. And counties, cities and schools are burning through local reserves to do so. Any delay in payments beyond April 10th property tax deadline for individuals or businesses that can pay will tip local governments into insolvency at a time when residents need us most. Counties will use all existing authority to cancel penalties and other charges. Basically, you need to pay your taxes. I just think it’s interesting that they’re giving themselves an out for the same thing that they expect landlords to do. But that’s just me. So they’re not willing to take the same break they’ve been making us do.

Just a heads up on vacation rentals. I think other cities are taking the clue. You had a few more cities, Newport and Santa Cruz, from last week decide that they were not going to allow for vacation rentals that were not COVID- related. La Quinta in Riverside County had already banned vacation rentals. If you couldn’t prove that you were doing it for something COVID-related. For instance, somebody self quarantining or you’re housing a first responder, La Quinta just didn’t think that was enough, so they have their own overlays. So again, you really have to pay attention to local housing markets. Your local city and county really understand who’s in control of issuing what.

Airbnb did come out with a $250 million host relief fund. So if you are a host, you might want to check out some of the resources that they might have available.

When it comes to moratorium and evictions, just be careful to also check the local overlays. Just because Newsom did what he did and then the Judiciary Council came on top and did what they did doesn’t mean that you won’t have a city that extended it. So really be careful.

With that, we are really happy to have Karaen Hall with us today. We had some questions about retirement accounts. Kaaren is, of course, the CEO of uDirect IRA Services, and she’s also a board member at the Retirement Industry Trust Association. So she’s here today to fill us in on what you can and can’t do with your retirement accounts at these interesting times. Welcome, Kaaren.

Kaaren Hall: Good morning, Aaron. How are you?

Aaron Norris: Good.

Kaaren Hall: Wow, there’s been a lot of change. This has been the year of change for the IRA for sure, where we haven’t seen much since TIPRA back in 2010. It’s been about that long since we had this many changes. First off, we had the contribution limits rise, and that’s normal. We would expect that, and it happened in October/November. So now if you have a traditional or Roth, you can contribute six thousand if you’re under 50, seven thousand if you’re fifty plus. 

So that was one change, and then just boom, the floodgates opened and lots of changes. So one of them has to do with RMDs. This has to do with CARES Act. The required minimum distribution is waived for 2020. So if you already took a distribution for 2020 and you want to put it back, you can as long as it’s within 60 days, so that’s good. And what’s also great, you know, as it says on the slide here, is that it’s not just if you’re an account holder in your RMD phase, but if you ever received an inherited IRA and you’re the spouse or the beneficiary and they have that inherited IRA. Then you can also go ahead and not take RMD in 2020. The nice thing is it’s not like you don’t take it in 2020 so you have to take double in 2021. It’s not like that. It’s just you’re not taking it. So that’s great.

And there’s just so much more. They came up with this thing called CRD: Coronavirus Related Distributions. Now think about this. Retirement dollars are precious. It is really hard to build a retirement account when you’ve got these caps, these contribution limits. So, yeah, you can tap into your retirement account, but really ask yourself and ask your tax adviser if that really makes sense for you because you might want a first look and see if you have any more PTO or sick leave or vacation leave at your employer if you’re looking for extra cash.

What I’m saying is that you can take this CRD, but before you do, I just want to point this out. If you need money before you dip in your retirement account again, look and see if you’ve got any extra PTO at work. Do you qualify for unemployment? You’re calling it a PUA. I heard it called a PUC: Pandemic Unemployment Compensation. So you might be able to get money that way; or even if you have whole life insurance, maybe you can take a loan from the cash value of your life insurance before you tap into your retirement account. But that said, with this CRD that came out with the CARES Act, you can take out up to $100,000 from your retirement account. And so it applies to IRAs and in all plans, really, but they’re two different worlds, two different sets of rules. One is for IRAs. So if your I.R.A. takes a Coronavirus-related distribution, a CRD, then it comes out, say it’s in a traditional IRA, it comes out taxable. Now the penalty will be waived, but it’s gonna be taxable, and then you’re gonna have one to three years to split up that tax liability. So it gives you a break. 

If you take the money out of a 401K, well, then it is viewed as a hundred thousand dollar plan loan that you pay back to your 401K. So IRAs and 401Ks have just totally different sets of rules. Anyway, it’s the same thing with the CRD. If you take out the money from an IRA, and it could be taxable, you take the money out from a 401K, you got to pay it back at the regular IRS rate.

So to be eligible, there are all kinds of rules. But basically, you have to be diagnosed with this disease or a spouse or dependent has to be diagnosed with it. The one that pretty much everyone falls under is that in order to qualify for the CRD, you have to have experienced adverse financial consequences as a result of being quarantined, furloughed, maybe you got laid off, you have your work hours reduced because of the virus. Maybe you’re unable to work because you can’t get childcare. That’s possible. I know that’s happened with a lot of people. Or maybe as a business owner, you’re closing or reducing your hours, and that’s happened to a lot of people, or other factors that are determined by the IRS. So that’s how you qualify for one of these distributions. But again, before you take money out of your retirement account, it’s like borrowing from your future self. You’re using it now, but you’re definitely going to need it later. So really think about it. There are other ways you can find money; but unlike any other kind of exception to a withdrawal penalty, just remember that the CRD, when it comes from an IRA, the penalty is waived and you can report the amount of withdrawal over three years. And of course, every state is going to have different rules. So you’re gonna have to ask the state about whether it’s taxable state wise. 

Aaron Norris: Has there been any documentation suggestion on what people should have on file for this, or probably just the drop of income would suffice?

Kaaren Hall: It’s where you basically certify it yourself. Self-Certified. It will be between you and the IRS to determine whether or not you are qualified to do this, like if you take this and you get audited and then they’re going to say, “Hey, prove it.” The penalties are they could put you in jail if you lie to the IRS. So I would not lie to the IRS. But those are the criteria. And by the way, if anybody would like a copy of this, I’d be happy to email it.

Aaron Norris: What I’ll also do is I’ll put the show notes, the actual PowerPoint slide PDF in the show notes today so people can download this. What Matt and Amanda had been doing is if you get updates on this, I’ll update this PowerPoint and we’ll try to keep the PDF updated as much as possible on your show so people can reference it.

Kaaren Hall: Fantastic. That’s great. That’s great, because it is changing. It’s been about a week since we’ve had a change, but there are a lot of changes.

Before you tap into this money, consider the other resources again. And here they are. So other things you can do to find money before you steal from your future self and take the money out of your retirement account.

Now when it comes to 990Ts, an IRA files a tax form 990T, like you and I, when we file our income taxes, we file a 1040 as an individual. Well, the IRA files a 990T if it owes tax. Of course, the IRA would owe tax if there was UBIT, or unrelated business income tax, or UDFI, unrelated debt-financed income tax. So the 990T filing, just like the 1040, the deadline got pushed forward. So if your normal filing date would have been April 15th, you get to have that extended out until July 15th. However, there are some different entities that if the 990T would have been due in May, there’s no postponement. With IRAs, if you’re filing a 990T, it would be due April 15th. Now that’s pushed out to July 15th. So that’s good news. You got a little extension there.

Aaron Norris: Now, a lot of our real estate investors that have self-directed IRAs, they’ve got illiquid assets, and let’s say I have a rental in my Roth and my tenant stops paying. Is there any way, depending on the structure, if I have a business LLC inside the IRA or just the IRA itself, can I be eligible for any of the programs that the government has come out with with the SBA?

Kaaren Hall: It would be nice, but not for an IRA because you apply for it as the business. It’s not available to IRAs. It’s available to individuals.

Aaron Norris: I was trying to think about if you were to able to do that, what if some of it became forgivable and how was that treated? What if you got, you know, a $10 grand track from the EIDLE program and then, you know, just “Thanks for playing.”

Kaaren Hall: The way that would be weighed is did you get personal benefit? If something like that were to happen, the way it’s weighed was a personal benefit. Is it a prohibited transaction?

Aaron Norris: Is there anything that the Retirement Industry Trust Association has put out as far as guidelines or concerns of things going on in the accounts, things that they are advocating for at the federal level?

Kaaren Hall: You know, we’re having another webinar today, so we’ll learn if there’s any update. But last Friday, there was a webinar, and that’s where I got all this detail about the CARES Act and how it affects us. One of the questions that did come up as a result of that webinar was from Amanda Han, and she was asking, “Are there any limits to what your CRD could be used for?” And right now, there are no limits. They’ve said if you’re going to take out money from your IRA, you can use it for anything. That causes some concern. Usually there are limits, but right now, there aren’t any. So we’ll see. I’ll get an update today from the webinar.

Aaron Norris: OK. Yeah. And then for those who are VIP subscribers with us, you got an invite yesterday for our investor town hall where Kaaren is going to be part of that call. Matt and Amanda Han, we’ve got David Granzella from the Sacramento NorcalREIA up there. We’ve got Lisa Hoegler with LA South REIA. Christina Suter with Pasadena FIBI, and we’ve got SDCIA. Lenska’s going to join us from San Diego. And then we’ve got Derek Harms from the North Sandigo Real Estate Investors Association. We’re just trying to hop around and get a s