IRA Financial’s Adam Bergman discusses the best ways to raid your retirement funds during the COVID-19 pandemic, if you do not have access to other funds to get through this difficult time.
Many Americans are having to raid retirement funds to meet their financial obligations due to the current financial crisis caused by the COVID-19 pandemic. Under “normal” times, your retirement plan should be left alone. Even still, it should only be used as a last resort. However, you might not have a choice. If your business is closed or you are out of work, you may needs that money just to get through this. You should consider alternatives first, but if you have no other choice, you need to be as efficient as possible when withdrawing retirement funds. After all, you need to get to retirement first, and tapping that money may be the only way.
Coping with Covid-19
Right now, many Americans are struggling to make ends meet. This is doubly true for small business owners who have shuttered their stores since March. Emergency funds have been depleted. Government stimulus packages have run their course, as have SBA loans for small businesses. Unemployment is still through the roof. The markets have rebounded some, but not all the way.
There’s about $30 trillion in retirement funds. Many Americans have been diligent about saving, but that makes them “retirement rich and cash poor.” With no end in sight to the pandemic, families are still struggling to make do. Further, schools were supposed to open, but outbreaks have curtailed that immensely. There’s not enough child care centers to allow working families to get back to work, even if they have a job to go to. Will there be more government funding? I wouldn’t count on it until after the election. If there’s a change at the top and across Senate, we may not see anything until the new president is installed. What can you do to ride this out? Well, if you are like many Americans, that means raiding retirement funds. There are steps to ensure that you don’t ruin your golden years.
Raiding Retirement Funds
Statistics are coming out showing that many Americans have withdrawn retirement funds to deal with financial hardships. Tens of thousands of dollars are being withdrawn at astronomical rates. People are distributing more than half of their 401(k) savings. But, are the doing it the right way? While that’s anyone’s guess, there are a few things to consider before withdrawing.
In addition to government stimulus packages, the CARES Act included several provisions for retirement account raiding. If you have been impacted due to the coronavirus pandemic, the rules are much laxer for taking funds out. You should be aware of these situations if you are considering withdrawing funds.
If you can prove that you were impacted by COVID-19, which most people can, you now have easier access to your IRA and/or 401(k) funds. Early distributions (those prior to age 59 1/2) are generally subject to a 10% penalty of the amount withdrawn. The CARES Act allows for penalty-free withdrawals due to COVID. Of course, taxes will still be due, however, they may be paid over the next three years. In fact, if you re-contribute the funds back to the plan within three years, you will get refunded any taxes paid. You are limited to withdrawing $100,000 in funds from your plan penalty free.
For 401(k) owners, generally, you need a triggering event to take any type of distribution. The CARES Act makes it so that a triggering event is no longer required to withdraw funds from the IRA. Please note, that these rules only last until December 31 of this year, unless renewed by the government.
Next is the 401(k) loan option, if it is made available to you. Not all plans allow for loans. However, if yours does, you may now borrow up to $100,000 from the plan. This is up from the usual $50,000. Further, you may borrow as much as you want as it is no longer limited too 50% of the account balance. Also, the repayment of the loan does not have to start for one year. Therefore, the loan has a full six years to be repaid, instead of the usual five years.
Of course, once payments are started, they must be paid at least quarterly at an interest rate of at least prime. Best of all, you are paying yourself back with interest. Obviously, funds borrowed from the plan are no longer earning for you, so only borrow what you need and repay it as soon as you can.
There are certain instances, such as medical expenses, higher learning and first time home buyer, where you can take a penalty-free distribution. This is an option for those who do not qualify for a COVID-related distribution. If you satisfy the conditions of the hardship withdrawal, you can get use of your retirement funds without penalty.
The last thing you should do is tap into your Roth IRA. These plans are designed to grow tax-free and touching them should be the very last resort. However, if you have no choice, you should only withdraw contributions you have made to the plan. These may be withdrawn at any time without tax or penalty. Early Roth IRA withdrawals are subject to taxes and penalties may apply.
Someday, this crisis will be over. All Americans will be back at work, markets will rise again and savings can resume. However, if you need to raid retirement funds during this time, do it smartly. The government has put into place provisions to allow easier access to these funds. Ultimiatly, only you can make the decision of how to keep your family and/or business afloat during these trying times.
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