The Corona virus has dramatically impacted American families’ personal and economic lives. Some have experienced job loss or reduced income, and many are dealing with long term uncertainty. The Federal Government stepped in with the Coronavirus Aid, Relief and Economic Security (CARES) Act, offering stimulus to businesses and expanded unemployment benefits to individuals. However, those benefits are only a partial supplement to much of what businesses and families have lost financially. The temporary nature of these benefits leave many families scrambling to plan for what may be next.
For these families, the temporary changes in the retirement plan rules may offer some relief. Specifically, the CARES Act expands access to qualified distributions and loans from retirement savings. As you read on, be aware that not all employer’s retirement plans will offer the freedom to take advantage of the loans and withdrawals outlined in the CARES Act. Families can confirm with their employer’s human resource department whether or not these provisions are available to them.
Firstly, the act allows you to cancel required minimum distributions (RMDs) for this year on 401(a)s, 401(k)s, 403(a)s, 403(b)s, 457(b)s, and IRAs, but more importantly the Act allows you to withdraw from the account without penalties. Normally you would pay a 10 % early withdrawal fee if your withdrawal occurred before the age of 59 ½. The CARES Act waives this penalty for amounts up to $100,000, however, the amount that you withdraw will still be added to your annual income and taxed. The act does allow the income to be split up evenly over the next three years (unless you choose otherwise) so that your taxes could be somewhat minimized. The CARES act also waives the tax withholding for these distributions.
In addition, the CARES Act expands the amount of loans that can be taken from plans to $100,000 or 100% of a participant’s vested balance. Loans must be taken within 180 days of March 27th, 2020. In order to qualify for the loans, at least one of the following criteria must be met:
- You have been diagnosed with COVID-19
- Your spouse or dependent has been diagnosed with COVID-19
- You have been financially disadvantaged as a result of COVID-19 policies (e.g. you lost your job, you were quarantined and couldn’t make money during that quarantine, you couldn’t work because of lack of childcare, or other factors.)
If this applies to you, your loan limit may be increased from $50,000 or 50% of vested account balances to $100,000 or 100%.
While all these benefits may help, withdrawing from your retirement account can also have a negative impact on your retirement, so this action should be taken only after other options have been explored. Consider some of these following first:
- Take full advantage of all unemployment benefits. Don’t assume you don’t qualify, and if you have been struggling to get benefits, hang in there and be persistent. Unemployment offices have been overwhelmed with claims, but if benefits are owed to you, they must still be paid, even if late.
- Turn to other savings. Tap emergency funds if you have them. Sell assets in other nontaxable accounts such as CDs and bonds.
- Make expense savings permanent. Many of us have learned to do without as bars and restaurants have closed. We have found free entertainment, as movies theatres and shows have been cancelled. We canceled memberships to gyms and fitness classes that we could do without. Make these changes permanent.
- Look to your mortgage company and landlord for some relief in the form of reduced payments or a rent or mortgage holiday. You may owe it later, but if it helps you avoid liquidating your retirement account, it will be worth it.
- Try not to suspend contributions to your retirement account, especially if you are sacrificing an employer match.
- Consider tapping your home equity. With interest rates at an all time low, your bank may consider it and you may still be able to qualify.
Regardless, if you have questions, get help before you act. Replacing income with a loan or a distribution from a retirement plan requires knowledge and careful consideration in times that are emotionally challenging. We are here to help you evaluate the best options to support both your short- and long-term financial goals. We are temporarily offering this consultation on a complimentary basis. Contact us if we can be of help.