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Retirement Accounts and COVID-19

May 05, 2020
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Many financial advisors have recommended that clients not look at their retirement account balances. It is natural to see the decline in value and want to do something about it. This can lead to some poor decision making. Primarily, moving to cash out of fear as the market bottoms and getting back in as the market recovers. Selling low and buying high. If, however, you need to reach into your retirement savings for living expenses you may have look at your retirement account balance. In this case it pays to plan out how much you need, when you need it, and if/when you can put it back. The CARES Act included temporary provisions for retirement account withdrawals, required minimum distributions, and retirement plan loans that factor into the decision to reach into your retirement savings.

If you have been impacted by COVID-19 the CARES Act allows total withdrawals up to $100,000 from your retirement accounts. This includes IRAs, qualified pensions, profit sharing plans, stock bonus plans, 401(k), 403(a), 403(b), and 457 deferred compensation plans. The withdrawal will not be subject to the 10% early withdrawal penalty if you are under 59 ½, but it will be subject to taxes. However, you can spread the tax payments over the next three years. The CARES Act also stipulates that you can recontribute these funds over three years and they will not count towards your maximum contribution limit for those years. So, if you withdraw the money, but end up in better shape than you thought, you can get it back in your retirement account without limiting your other planned contributions for the year. To fully understand the financial implications, consult both your financial advisor and tax professional before taking any withdrawal.

Some of you may be in a different situation. Maybe you are taking required minimum distributions only because they are, well, required. Lucky for you all required minimum distributions from retirement accounts have been waived for 2020. If you do not need to take the required minimum distribution for living expenses this may be a good opportunity to save that money. Or this may provide an opportunity to give to a charity with a qualified charitable distribution.

The CARES Act also allows changes in loans from retirement plans. Loan limits have been doubled to $100,000 and capped at 100% of the vested amount instead of 50%. This provision applies to loans from eligible retirement plans taken within six months of the CARES Act enactment. There is also a possibility that if you had an outstanding retirement plan loan that you can delay payment for up to a year. Retirement plans are not required to enact these provisions, though. Check with your plan sponsor to see if your plan will allow the increased limits on loans.

This is only part of what the CARES Act covers and more information can be found at irs.gov, treasury.gov, or the full text at www.congress.gov/bill/116th-congress/senate-bill/3548/. If you do need to dip into the retirement savings be sure not to take the decision lightly. These provisions may ease the limitations on retirement savings access, but those limitations are there for a reason. Keep that in mind if you need to access that money now and use only what is necessary. Be safe and we’ll talk soon.

Good Reads

Lenders are tightening up.
https://money.yahoo.com/lenders-slash-credit-limits-tighten-standards-in-the-pandemic-185129127.html

California looks toward reopening with the possibility of some businesses opening Friday.
https://www.cnbc.com/2020/05/04/california-gov-gavin-newsom-says-some-businesses-will-reopen-friday-with-conditions.html

Just in case 2020 wasn’t already a nightmare…murder hornets.
https://abcnews.go.com/US/wireStory/murder-hornets-sting-kill-lands-us-70495354

The linked articles listed here are intended for informational purposes only and are not intended to be a substitute for specific tax, legal or investment advice. Please consult a financial professional prior to making any investment decisions.