Unprecedented times calls for unprecedented measures, and that is exactly what we are seeing from the Federal government in response to the COVID-19 pandemic. As the global economy standstill continues, businesses are forced to remain closed. These measures are having a drastic effect on the ever-growing unemployment rates. In order to combat these negative bearings, the Coronavirus Aid, Relief, and Economic Security Act (CARES) was signed into law by the President of the United States. The law is meant to address the economic fallout head on by providing direct payments to all Americans, help major companies with payroll, and prevent small businesses from closing.
The $2 trillion dollar stimulus package also includes numerous temporary provisions for retirement accounts. Usually there are many strict rules that are attached to individual 401(k) and other similar retirement savings accounts but because the number of Americans need a rapid cash flow, these restrictions are being halted.
The question is should you take advantage of it? Experts typically advise against it, but the fallout from the crisis has left many people with little to no choice to pay their bills after being laid off or furloughed.
Before we get into the pros and cons, let’s review exactly which rules and restrictions are being amended.
401(k) plan participants who are under the age of 59½ can withdraw up to $100,000 without paying the usual 10% early withdrawal penalty. Note: you would still owe income taxes if you do not replace the money within three years.
Another option would be to borrow up to $100,000 or 100% of your retirement account in the form of a loan. Previously, the same borrowing concept rule was in place, but the difference is now the limit has been increased from $50,000 to $100,000 (or 100% percent of account). Additionally, typically you have up to five years to repay a 401(k) loan. Now the new provision gives an additional year to pay back the money, increasing the time period to six years.
To qualify for the retirement withdraws or loan stipulations, you must have suffered a financial hardship directly related to the pandemic. That includes being diagnosed with Covid-19, special quarantine circumstances, business closures or reduced hours or inability to work due to child-care issues.
Although these restrictions are being lifted, it is very important to be extremely cautious if you need to withdraw from retirement accounts. Many experts recommend that this should be a last resort. Withdrawing funds from any retirement account can have a major adverse effect on the number of years you have to work.
“You want to access your immediate savings first before you take out a loan or withdrawal from your 401(k),” says John Carter, president and chief operating officer at Nationwide Financial. “History tells us that when markets rebound after a downturn, it typically happens fast. Tapping into your retirement funds may prevent you from benefiting over the long haul if you take out loans and stay out of the market.”
For all official regulations and tax inquiries reach out to https://www.irs.gov/coronavirus or reach out to a highly experienced Certified Public Accountant.