The second coronavirus checks are still in limbo as lawmakers have failed to reach a consensus. It would have disappointed many who were left out (or got less money) from the first stimulus package and were hoping to be included this time. One such group is retirees with income more than $75,000. However, some retirees may still qualify for the first coronavirus stimulus check if they act smartly.
Issue that retirees are facing
Income of most retirees comes from investment accounts and Social Security benefits. In 2020, the maximum Social Security benefit provided $45,480 in annual income. This means the likely reason some retirees exceeded the income limit for the stimulus checks was because of investment income.
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For retirees, it is mandatory to take out money from investment accounts to meet the required minimum distribution (RMD) rules. RMDs count as taxable income. However, the CARES Act suspended RMDs for 2020. Moreover, those who withdrew any RMDs before the CARES act was passed were allowed to put it back.
This means that retirees can choose not to withdraw their RMD to qualify for the stimulus checks. However, there could be circumstances when retires can’t meet their expenses without contributions from RMDs. But, doing this could make such retirees ineligible for a coronavirus stimulus check.
There are a few ways (discussed in the second part) that can help such retirees meet their expenses, as well as qualify for the stimulus checks.
Many retirees may have a question of why their RMDs in 2020 would make them eligible for the coronavirus stimulus check that was passed in March. The question is valid considering the IRS is using 2018 or 2019 taxes to determine the stimulus checks eligibility.
The first stimulus checks were designed as an advance on new tax credits for 2020. So, if you were not eligible for this credit based on your past years tax return, you can still claim it when you file your 2020 return.
Use Roth Accounts – unlike the RMDs, withdrawals from Roth accounts do not count as taxable income. So, if you have funds in a Roth IRA or a Roth 401(k), you should try to withdraw from these accounts as it would allow you to meet expenses without increasing your 2020 taxable income.
Use Health Savings Account Reimbursements – retirees may also consider using funds from their Health Savings Account (HSA) so that their taxable income does not increase. Similar to a Roth account, HSA funds can be withdrawn tax free, provided funds are used for qualified medical expenses.
One more way is not to aim for a full $1,200 stimulus check, but for a partial amount. The CARES Act offers a full check of $1,200 to those with annual income less than $75,000. Those with income above $75,000 but below $99,000 qualify for a partial stimulus payment. So, if retirees can’t live without withdrawing from RMD, then they should aim for an RMD amount that still qualifies them for at least a partial stimulus check.