The CARES Act Makes It Easier To Tap Your Retirement Savings. Don't Be Tempted
It sounds enticing, I know. There's a good chunk of cash that you can access without penalties. So why not just do it? Please don't.
I'm talking about your retirement savings, particularly the savings in your IRA, 401(k) or other retirement accounts. Thanks to the recent CARES Act, the rules for getting to your retirement funds have been significantly relaxed. It's now much easier. You first must prove that you've been either medically and/or financially affected by COVID-19, and most of us have been.
How does the CARES Act impact 401k?
Assuming you're under 59½ years old, you can now withdraw as much as $100,000 from your company retirement or personal IRA accounts without paying the 10 percent early withdrawal fee. Not only that, but you can spread the payment of the taxes you owe on those withdrawals for up to three years and the withdrawal won't be subject to a mandatory withholding. The distribution can be made through Dec. 31, 2020.
Reasons for not making withdrawals from retirement funds
For starters, I believe (and of course this is my opinion) the economy will begin to recover. I believe that a full economic recovery will take a lot less time than others predict – possibly months, not years. I believe that treatments and ultimately a vaccine will be available and that will put our fears about COVID-19 to rest. Companies will start re-hiring again soon. You will find work. You will get back on your feet. The financial markets will be volatile, but ultimately they will rise over the long term.
Removing your savings means you won't be able to take advantage of those future increases. It is the market appreciation that provides the asset values and incomes to so many retired people and that helps them sustain (and even improve) their livelihoods well after they've stopped working.
Other options if you need financial support
Don't want to withdraw but still need money? The CARES Act now allows you to borrow up to $100,000 from your nest egg. You can also delay the repayment of your loan for a year. The maximum amount you may take was 50 percent of your vested account balance, or $50,000, whichever is less, but that rule has been waived. Even if 50 percent of your vested account balance is less than $10,000, you may borrow up to $10,000 if your plan allows it. Any coronavirus-related loans must be initiated between March 27 and Sept. 23, 2020.
It does sound enticing, doesn't it? Up until now, the costs of taking money out of your retirement accounts – whether through distributions or loans – was just too high for many people. But temporarily there's basically no cost at all. And you can even access more of your retirement savings too. Shouldn't you jump on the opportunity?
Please, don’t be tempted.
I get why Congress has done this. Many are really hurting as a result of the coronavirus pandemic. People are out of jobs and have depleted their savings. For some, accessing their retirement money may not even be a choice. The fact that you can do this is certainly a help, and if there are no other options then you'll have to do what you have to do. But, as a financial professional, I recommend you to try not to.
A loan might be better
What if you need the money now? What if you have no other options? If you must access your retirement savings, then I recommend you do so in the form of a loan. You will have up to five years to pay it back, but hopefully you can do it sooner. You can do this through a payroll deduction so it's seamless. You'll have to pay interest, but the good news is that the interest – although paid back with after-tax money – is effectively paid to yourself, so the cost of the loan is minimal. You can also pay back the loan well ahead of schedule if you're able.
Another benefit to getting a loan is that you can still make contributions to your retirement account up to the usual maximum amounts (for 2020, the maximum contribution to a 401(k) or similar retirement plan is $19,500. If you’re 50 or older, you can also contribute an extra $6,500. The annual limit for an IRA is $6,000, with a $1,000 catch-up limit if you’re 50 or older, even as you’re paying back your loan.
Some financial advisors say that if the stock market does decline the fact that you're buying back your portfolio in a down market can also provide larger long term returns, although that is debatable.
So, if you really need the money, a loan from your retirement plan might be the best option. If you have other choices ahead of dipping into your retirement savings, then consider those. If you're over the age of 70½ and still don't need the money, then leave it in there because the CARES Act also pushed back the minimum required distribution rules for 2020. So, you can benefit from any market gains and avoid withdrawal taxes even longer.
Staying the course for retirement
I know, I know, the money in your retirement account is tempting and you need the cash now. If you absolutely, positively must get at it, then you should. But if you can find any other sources of cash to support you for the short term I strongly advise keeping your money there. This downturn will end. Don't let this temporary crisis impact your long-term financial future.