4 ways your retirement accounts have changed due to coronavirus

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The COVID-19 pandemic has affected almost every aspect of American daily life, particularly from a financial perspective. About half of American adults say their personal finances have been threatened by the coronavirus, according to a recent Pew Research Center survey, and almost 90% of Americans are concerned about the impact of the virus on the US economy.

Recently, Congress passed the Coronavirus Aid, Rescue and Economic Security Act to provide relief to those experiencing financial difficulties as a result of COVID-19. Not only will millions of Americans receive stimulus checks, but the bill will also affect your retirement accounts in several ways.

Man holding hundred dollar bills.

Image source: Getty Images.

1. You can make difficult withdrawals without incurring penalties

If you are facing significant economic hardship and cannot afford to pay your bills, you can choose to dip into your pension fund. Generally, when you withdraw your savings from your traditional 401 (k) or IRA before the age of 59 and a half, you will have to pay a penalty of 10% on the amount you withdraw. However, you can now withdraw up to $ 100,000 from your retirement account without paying the 10% penalty.

One caveat to the new rule is that to avoid the penalty, your withdrawals must be for expenses related to the coronavirus. This means that to be eligible for these withdrawals without penalty, you or a loved one must have tested positive for the virus, or you must have suffered financial consequences due to job loss, reduced hours or quarantine.

Remember that withdrawing from your pension fund should be a last resort, as it can potentially spoil the rest of your retirement plan. But if you run out of options and are in desperate need of money, this new rule can make it easier to access your savings.

2. Taxes on withdrawals can be paid over three years

When you withdraw money from your traditional 401 (k) or IRA before the age of 59 and a half, not only are you subject to a 10% penalty, but you will also have to pay income taxes on your withdrawals. Even if you are eligible to avoid the 10% penalty when making coronavirus-related withdrawals, you will still have to pay taxes on the amount you withdraw from your retirement account.

However, under the new regulations, you now have three years to pay taxes on your distributions. If you are having financial difficulties, being able to defer these tax payments can go a long way.

3. You can borrow more from your 401 (k) and take more time to pay off the loan

Borrowing money from your 401 (k) is sometimes wiser than withdrawing, as it can help keep your retirement savings on track when you have to repay the amount you borrow. In general, the rules around 401 (k) loans are that you can only borrow up to $ 50,000 or half of your retirement account amount (whichever is less), and you generally have to repay the loan in 5 years.

Under the new coronavirus rules, you can borrow 100% of your acquired account balance up to $ 100,000. In addition, you will also have an additional year to repay your loan. Keep in mind, however, that it’s not because you can borrow as much as you should. Paying off your loan (with interest) could potentially strain your budget over the next few years, so if you decide to borrow on your 401 (k), only borrow the minimum amount you need to make ends meet.

4. Retirees may delay taking the minimum distributions required

Generally, you should start withdrawing money from your traditional 401 (k) or IRA at the age of 72. These are called Minimum Distributions Required (RMD), and they exist because your investments in these types of accounts are only taxed when you withdraw your money. Because Uncle Sam wants his cut afterwards, the IRS forces you to start withdrawing your money at age 72 so that he can collect taxes.

But since it is not always wise to withdraw your investments during a recession, the new regulations allow retirees to delay taking RMD for a year. This means that if you turn 72 this year and would normally start taking RMDs, you can wait until next year to start. This gives the stock market more time to recover, so you don’t block losses by withdrawing your money when the market is down.

The coronavirus has changed many aspects of society and also affects retirement accounts. If you’re struggling financially and need additional help, these new regulations are designed to make your life easier.



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