Weigh Your Options Before Tapping Your Retirement Account (Article)
Weigh Your Options Before Tapping Your Retirement Account
In a few short months, financial realities have changed for many. Faced with new challenges, you might consider how an early withdrawal or loan from a retirement account could help ease the pain. However, be careful; you need to consider the impact withdrawals and loans can have on your future self, before hitting that submit button.
First, let’s review: you’re free to take a withdrawal from a former employer’s retirement plan or IRA at any time, but you will be required to report any pre-tax dollars withdrawn as taxable income and pay taxes on that income. Additionally, you will owe a 10% federal tax penalty if you’re under the age of 59 ½.
The rules vary for your current employer’s retirement plan. Some employer plans offer in-service distributions for financial hardships and loans; others do not.
Optional withdrawal and loan relief provisions were included in the CARES Act legislation to provide assistance for those affected by COVID-19, but not all employers instituted these new rules. Reach out to your Human Resources Department to determine if your employer adopted these provisions.
Coronavirus Related Distribution (CRD)
This special distribution provision allows you to withdraw up to $100,000 until December 31, 2020 if you have experienced a financial impact from the COVID-19 pandemic. With this distribution, you will owe income taxes on any pretax dollars withdrawn, however, you will not pay the customary 10% early withdrawal penalty, which usually applies to those under age 59 ½. Instead of owing income taxes in the year of the distribution, this withdrawal will be taxed over three years, unless you elect otherwise. You also have the ability to repay the withdrawal over a three-year period.
Loan Limits Increased
Your plan’s loan limits may have increased. Available until September 23, 2020, you may now request up to $100,000 or 100% of your account balance, whichever is less. In addition, you may delay beginning repayment for up to one year. Lastly, if you are currently making payments to existing loans outstanding between March 27, 2020 and December 31, 2020, those payments may also be postponed. The due date will be extended by one year; although, interest will continue to accrue even though you are not making payments.
Before taking a distribution or loan, explore other sources first, such as reducing your savings rate or talking to creditors. If you must tap your retirement accounts, continue to contribute so that you capture any matching contributions offered.
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