There’s no doubt about it: $2 trillion is a lot of money. We’re just beginning to get a clearer picture of the details buried in the massive stimulus package passed by both houses of Congress and signed into law last week by President Trump. The unprecedented bill, passed in record time in response to the enormous impact of the coronavirus pandemic, is going to touch practically every facet of society. It also contains a set of provisions that may allow you to touch something else: the balance in your 401(k).
We encountered a barrage of articles about this important rules change, including this one by Emily Brandon from the USNews website. Brandon writes that the CARES Act – which stands for the Coronavirus Aid, Relief, and Economic Security Act – allows you as holder of a retirement account to withdraw funds for emergency costs related to the coronavirus pandemic, while delaying the tax consequences. It lets workers borrow more against their 401(k) and take longer to pay it back. The CARES Act also changes (temporarily) the rules governing Required Minimum Distribution, or RMD withdrawals. Let’s take a look.
New Retirement Account Rules Allow Penalty-Free Withdrawals for Coronavirus Expenses
As Brandon reports in USNews, “Retirement savers who have been negatively impacted by the coronavirus crisis can now withdraw up to $100,000 from a 401(k), IRA or similar type of retirement account until December 31, 2020, without being charged the usual 10 percent early withdrawal penalty.” This significant relaxation of the 10 percent penalty rule applies to those who have been diagnosed with COVID-19 by a CDC-approved test procedure. It also applies if a spouse or dependent has experienced the disease.
But the real catch-all is this provision, according to USNews: “Those who experience adverse financial consequences as a result of being quarantined, furloughed, laid off, reduced work hours or being unable to work because of a lack of child care due to the coronavirus pandemic are also eligible for the emergency withdrawals.” That’s a big enough net to encompass almost anybody, we think. You will owe income tax on withdrawals from tax-deferred accounts, but the CARES Act allows you to spread that income tax bill over three years, starting with the distribution year.
New Retirement Account Rules: It’s Legal, But Is It Smart?
The USNews article warns that using your 401(k) as a source of emergency dollars, while allowed under the new rules, may be extremely unwise. “[You] will be drawing from an account that has recently lost value without giving it time to recover,” Emily Brandon writes. As one certified financial planner told Brandon, these withdrawals may be tempting, but you’re undermining your own retirement future. “Find any other way to get by before you rob your retirement account,” she advises. “Not only will you be withdrawing funds at a greatly reduced share price, but your money could be ‘out of the market’ on those critical days during the market recovery.”
We found similar advice in this related article in Fast Company. “You’re better off using anything else before using your retirement savings,” one CPA said. Another planner urged, “Don’t mortgage your future if you have other options.” These options could include SBA loans, home equity lines of credit, or a reverse mortgage for those 62 and older. USNews offers a few suggestions instead of borrowing. “Slash your expenses, call your creditors about options and employ any other assets to get through this current crisis before also placing your retirement readiness in jeopardy.”
New Retirement Account Rules: Changes to RMD, 401(k) Loans, IRA Contributions
The CARES Act makes other important changes to retirement account regulations, so we strongly suggest you contact your financial planner to review your situation. If you need a referral to a trusted financial professional, please call AgingOptions and we’ll be happy to assist you. Meanwhile, here are three additional provisions of the CARES Act that you should know about.
- RMD Delayed: As USNews points out, people over 72 with retirement accounts are generally required to take withdrawals annually. The CARES Act allows those who don’t need the cash to skip their 2020 required minimum distribution. The rationale: leaving the money on deposit gives balances depleted by recent stock market losses time to recover before resuming distributions.
- 401(k) Loan Limit Raised: According to USNews, 401(k) depositors can typically borrow up to half of their vested account balance, with a $50,000 maximum. Under the CARES Act those ceilings are raised to 100 percent of their vested account balance with a $100,000 maximum loan. You’ll have 5 years (in most cases) to pay back the loan, but those annual payments plus interest and fees could cause strain in the years ahead. What’s more, if you lose your current job that loan may come due sooner than you expected. Make sure you get good advice before borrowing against your 401(k).
- Extra Time to Add to Your IRA: Because the due date for filing federal income tax returns has been postponed until July, the deadline for making IRA contributions for tax year 2019 is now July 15, 2020. This could allow you to buy mutual fund shares when stock prices are depressed, creating what one adviser calls “a unique opportunity.”
Two Important Retirement-Planning Announcements from AgingOptions
At AgingOptions our chief desire is to help you prepare for the kind of retirement you’ve always dreamed of having. Toward that end, we want to share two important announcements that are designed to facilitate your LifePlanning process even during this period when most of us are required to avoid gathering in groups.
First, Rajiv Nagaich has scheduled several of his popular, free LifePlanning Seminars in the form of webinars that you can watch conveniently at home. Simply visit our Events Page and register for the webinar of your choice.
Our second announcement: in cooperation with our partners at LifePoint Law, we are excited to launch a ground-breaking new service called the LifePoint Law Emergency Legal Kit. Without leaving your home, you can now consult with a LifePoint Law attorney who will work with you to prepare and sign a complete set of vitally important legal documents including both Financial and Healthcare Powers of Attorney, a Living Will/Advance Directive, a Will or Trust, and much more. Click on the link or call us at AgingOptions and we’ll explain this excellent service to you.
Reliable information has never been more important – and that’s our promise to you at AgingOptions and LifePoint Law. Age on!
(originally reported at https://money.usnews.com)