How to Get Your $1,200 From the Government Stimulus Package

Colin Slabach
April 1, 2020

In response to the COVID-19 crisis, the bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act passed both chambers of Congress and was signed by the President on March 27, 2020. The bill gives a $1,200 “recovery rebate payment” to taxpayers, plus an additional $500 per child under the age of 17. The consensus is that the first round of checks will go out sometime in April. For most people, the money should be directly deposited into the account that they received their 2018 tax refund unless they have already filed for 2019. If you didn’t provide the IRS with direct deposit information or the account is closed, the IRS eventually will mail you a check, which will take longer than the direct deposit.

 

Income Phase-Out

 

There are limitations, and those with adjusted gross income (AGI) over $75,000 (single), $150,000 (filing joint), and $112,500 (head of household) can expect a reduced benefit. The payout is reduced by $5 for every $100 the tax filer receives in excess of the limits. For example, if a couple (which files jointly) earned $165,000 in 2018 and has not filed their 2019 tax return, they will receive $1,650. The amount earned is $15,000 in excess of the limit ($165,000 - $150,000) which is multiplied by .05 (5%) to get to $750. The $2,400 credit ($1,200 per each person) is reduced by the $750 to yield a $1,650 credit. This translates to a maximum AGI for a couple of $198,000 before they receive no benefit.

 

Timeline to Receive the Money

 

The exact date is unknown but with most of the checks being sent via direct deposit, they should arrive quickly. Treasury Secretary Steven Mnuchin stated in a White House press conference and later reaffirmed in an interview on CNBC that relief checks should start being paid within three weeks. He also said, “we’re determined to get money into people’s pockets immediately,” and continued to reiterate this throughout the interview, which suggests that the money should be sent out sometime in early April.

 

Is There Anything I Need to Do?

 

Find out what bank account received your latest tax refund. This is where the IRS will most likely send your money. The first round of payments will be sent out via direct deposit followed by checks sent in the mail. The IRS will send you a letter 15 days after the payment to let you know that the money has arrived. If there is any confusion or mix up, there will be a phone number that you can call within in the letter.

 

Anything Else I Need to Know?

 

RMDs

The CARES Act also waives required minimum distributions (RMDs) for 401(k), 403(b), 457(b), and IRAs. Previously, if an individual failed to take an RMD for 2019 they would be forced to pay a 50% penalty of the RMD amount. However, those who turned age 70 ½ in 2019 (before the SECURE Act changed the start age to 72) will no longer need to take an RMD for 2019 or 2020.

 

401(k) Loans

401(k) and 403(b) participants will also be allowed to withdraw up to $100,000 from their plan without the 10% penalty; however, they will still need to pay the taxes on the distribution.

Retirement plan loans have also doubled from $50,000 to $100,000. Specifically, the amount that can be borrowed is up to 100% of the vested account balance with a $100,000 maximum, whereas previously the rules allowed for the lesser of $50,000 or 50% of the vested account balance. The notable exception being that the plan allows 100% borrowing up to the vested balance or a $100,000 max. For example, a person with $85,000 in their 401(k) can now borrow the entire account balance, while before they could only access half.

Another benefit is that existing loan payments owed by the participant to employer-sponsored retirement plans are delayed until the end of the year.

Still, financial planning best practices suggest that people should avoid borrowing money from their employer-sponsored retirement plans, as the money that the participant will be using to pay the loan back is after-tax dollars to replenish a pre-tax 401(k).

 

COVID-19 Related Distribution

The CARES Act allows for those affected by the COVID-19 virus to withdrawal up to $100,000 in 2020 from their employer-sponsored retirement plan, Individual Retirement Account (IRA) or a combination of both in 2020. The 10% penalty is waived for those under the age of 59 ½ and the income can be distributed over a three-year period. To qualify, an individual must meet one of the following:

  • Diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention
  • Spouse or dependent diagnosed with the virus
  • Experienced adverse financial consequences as a result of a quarantine. This includes those who are furloughed, laid off, have work hours reduced due to the virus, or are unable to work due to the lack of childcare
  • Forced to reduce hours or close small business(es) due to the virus

Also included in the qualifications list will be “other factors” that are still being determined by the Secretary of the Treasury or the Secretary’s delegates.

This comprehensive list suggests that many people will qualify for the $100,000 COVID-19 distribution. There is also an option to repay the withdrawal amount over the next three years. The three-year window begins on the day you receive the distribution and can be paid back in one lump sum or over multiple smaller payments.

 

Temporary Relief for Federal Student Loan Borrowers

Student loan payments are postponed until September 30, 2020, and borrowers will not accrue any interest on the loan. To stop the Federal student loan payments, you need to contact your loan provider.

Additionally, wage garnishments, reduction of tax refunds and any other involuntary collections will be suspended until September 30, 2020.

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