CARES, the law just passed by President Trump, contains many provisions for those who save and live in retirement. But experts say those who can take advantage of the new law have a lot to consider.
The law temporarily relaxes the rules on hardship distributions from retirement accounts, giving those affected by the crisis up to $ 100,000 of their retirement savings without the usual 10% penalty.
The law also doubles the amount that 401 (k) participants can take out loans from an account for the next six months at the lowest of $ 100,000 or 100% of the account balance. IRAs do not allow loans.
The new rules apply to a wide range of people, including those who have lost their jobs due to the pandemic, those who suffer from COVID-19 or who have a spouse with the virus.
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If your emergency savings fund is low, it may make sense for you to use your 401 (k) to overcome the COVID-19 pandemic, says Keith Whitcomb, director of analysis at Perspective Partners. “The CARES law is designed to improve this financial alternative,” he says.
Is the money worth the disruption?
Although the new law offers more options for people who are experiencing financial difficulties, think carefully before you act.
Having to sell investments at a much lower price in COVID-19-induced stock market liquidation, your 401 (k) can become a potential source of funds, says Whitcomb. “It is true whether you borrow or withdraw a difficult account from your account,” he says. “However, if your 401 (k) has assets in cash or short-term bonds that have not been affected by the market downturn, it may be wise to sell these investments in order to generate cash. “
In addition, disrupting 401 (k) asset accumulation with hard loans and withdrawals is generally discouraged. “However, if a 401 (k) withdrawal allows you to reduce your current payments, refinance at a lower interest rate, or eliminate debt, the bottom line can strengthen your financial situation while simultaneously helping you pay your bills.” invoices, “says Whitcomb.
Whitcomb also notes that the COVID-19 crisis has destabilized the job market as companies close to stop the spread of the potentially deadly virus. “This can be taken into account in your decision because if you quit or lose your job when you have a 401 (k) loan, it must be paid in full before this year’s tax reporting deadline,” said -he. “With a few exceptions, you would normally pay income tax and a 10% penalty on any outstanding balances. However, CARES law removes the penalty, subjecting the amount only to income tax. “
Remember, says Whitcomb, even with the help of CARES, difficulty withdrawals from your 401 (k) will still be considered ordinary income for tax purposes. “But if you fill in the wages lost as a result of a layoff, your tax bill could end up being about the same as a” normal “year,” he said.
Others also note that removing the 10% early withdrawal penalty will help many retirement account holders. “This is welcome for people who have no other resource than touching retirement to provide temporary financial relief,” said Rose Swanger, certified financial planner at Advice Finance. “As the old saying goes, the bills keep coming just because you are sick or unemployed. “
Here is a tactic to consider if you intend to take a distribution. Sell the fixed income portion of your portfolio. That way, you leave your actions “intact to participate in the recovery when it occurs,” says Charles Sachs, a certified financial planner at Kaufman Rossin Wealth.
Waiver of RMD 2020
For retirees and inherited IRA owners, the law suspends for 2020 the minimum required distributions (RMD) that the government requires that most people take tax deferred 401 (k) s and individual retirement accounts (IRAs) ) from the age of 70 or a half. 72.
And this can be useful to many owners of retirement accounts. Why? An RMD is calculated for each account by dividing the balance prior to December 31 of this IRA account or retirement plan by a life expectancy factor. “If we had used it to calculate the RMD, each retiree would have a higher inflated amount than what he currently sees on paper,” says Swanger. “By skipping a year, it helps retirees recover their investments and minimize the tax impact.”
For his part, Alex Offerman, a certified financial planner at Model Wealth, says that renouncing RMDs gives account holders a “free year” of tax planning. “This free year gives them the opportunity to complete Roth IRA conversions that would otherwise be unwise for them,” he says. “Particularly coupled with the lower tax rates of the 2018 Tax Reduction and Jobs Act.”
Others agree. “The elimination of RMDs makes Roth conversions even more attractive to some people,” said Rob Greenman, a certified financial planner at Vista Capital Partners. “People who had planned to have a certain amount of their adjusted gross income from an RMD found themselves having a little extra leeway in certain tranches to make an additional Roth conversion amount. “
A Roth IRA conversion is the tactic of distributing all or part of your funds from a traditional IRA to a Roth IRA. The distribution is taxed as ordinary income.
Robert Powell is the editor of TheStreet’s Retirement Daily www.retirement.thestreet.com and is a regular contributor to USA TODAY. Do you have questions about money? Email Bob at [email protected]