Q&A: Should I Dip Into My Retirement Savings During a Financial Crisis?

By: Stacey Nickens

Back in March, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The new legislation made it easier for Americans to withdraw money from their retirement accounts. CARES temporarily waives the 10% early-withdrawal fee as well as increases the amount of money you can borrow from your retirement accounts. Understanding the new rules as well as other regulations for loans and early withdrawals can help you decide the best options for you and your family. As always, keep in mind that withdrawing money from your retirement accounts may negatively impact your financial health during retirement.

Penalty-Free Withdrawals

Under CARES, individuals with an IRA or retirement plan can take distributions of up to $100,000 in 2020 for a “coronavirus-related” reason. One coronavirus-related reason is when an account holder is diagnosed with COVID-19 or certain family members of an account holder are diagnosed with COVID-19. Additionally, you can take a penalty-free distribution if you’ve experience financial hardship as a result of quarantine, such as being furloughed or laid off. If you’re a business owner, financial hardship could also mean having to reduce business hours or close your business. If you are not able to work as a result of not being able to find child care during the pandemic, you may be able to take a penalty-free distribution as well. As was the case before the CARES Act, you can also typically take a penalty-free distribution in the following cases:

  • The account owner dies or becomes disabled.
  • The account owner experiences medical expenses that surpass 7.5% of their adjusted gross income and are not reimbursed.
  • The account owner takes a series of largely equal payments over the course of their life.
  • The account owner gives birth to or adopts a child. (Up to $5,000 per account owner.)
  • A military reservist is called into active duty.
  • The account owner makes a first-time home purchase ($10,000 lifetime limit), incurs certain higher-education expenses, or is responsible for health insurance premiums after being laid off. (These instances are only available to IRA owners. Work-place plans have a few different exceptions.)

Tax Implications

If you take a COVID-related distribution, you are not responsible for paying the 10% early-withdrawal penalty. However, the distribution will still increase your taxable income for 2020. For tax purposes, you can spread out the distribution-related income over three years or reinvest the funds within three years. If you reinvest the funds, you can amend your 2020 return to seek a refund on the previously-paid taxes.

Retirement Plan Loans

You may also consider taking a loan against your work-based retirement plan. Traditional rules allow you to borrow the lesser of two options — 50% of your balance or $50,000. You must repay the loan within five years. However, the repayment period may be longer if you use the funds to purchase a primary residence. The CARES Act allows employers to offer an increased loan amount to employees impacted by COVID-19. The loan would then be the lesser of 100% of their employee’s balance or $100,000. Check with your employer to see if this is an option, as employers are not required to implement this provision. If you have an outstanding loan on a work-based retirement plan, you can delay 2020 payments for a year. The loan will still accrue interest during this time.

Hardship Withdrawals

As a last resort, you may also be able to take a hardship withdrawal from a work-based retirement plan. However, these withdrawals are not exempt from the 10% early-withdrawal penalty.

Final Considerations

Before taking a withdrawal from your retirement account, I encourage you to set up an appointment with me. We can review your entire financial picture as well as your retirement goals. Though you may need more funds now, you don’t want to put yourself in a difficult position for the future. As always, it’s important to consider your long-term goals in addition to your short-term needs.

Source: Broadridge Advisor Solutions
Disclosures: Past performance is not a guarantee or a reliable indicator of future performance. All securities carry a unique set of risks subject to a variety of factors. There is no guarantee that these investment strategies will work under all market conditions or that they are are suitable for all investors. This material has been distributed solely for informational purposes and should not be considered as individual investment advice or recommendation. Individuals should consult their investment professional prior to making an investment decision.