Even though news about the CARES Act focused on the stimulus checks and benefits for those who were unemployed, there were also far-reaching implications for retirement savings. This has created contention among financial experts as to whether leveraging retirement accounts is a good idea. Doing so can neutralize some financial stress, but there is also a major impact on your future retirement. It can impact retirement timing as well as income.
In case you opt to tap into your retirement savings, here are some ways you can do so:
- You might be able to take an early distribution. If you’re enrolled in certain tax-advantaged retirement plans — like a 401(k), 403(b), 457, or Traditional IRA — you could be eligible to take out up to $100,000 in 2020 without paying the 10% penalty tax. This is called a “hardship distribution” and if you’re under age 59.5 and are considering this emergency withdrawal, we suggest talking to your financial advisor or CPA. (Don’t have one? We’ve got you covered: reach out to your Sente contact for a vetted recommendation.)
- Loan options have been expanded. Normally, owners of certain retirement accounts, like 401(k)s, are allowed to borrow up to $50,000 or 50% of their vested account balance, whichever is less. This depends on if your employer allows retirement plan loans, but most do — and there are no restrictions on how the loan can be used. The CARES Act has doubled the loan limit to up to $100,000 or 100% of the vested balance in your account, whichever is less. Here’s a catch: there’s a deadline of September 23, 2020 for loans to be taken out. While the loan will accrue interest this year, the bill also allows borrowers to forgo repayment throughout the remainder of 2020, starting the standard five-year repayment process in 2021.
- Over the age of 70.5? Required minimum distributions (RMDs) are suspended. Retirees over the age of 70.5 or 72, depending on birthdate, have been required to take a minimum monthly distribution from their tax-deferred accounts every year. The CARES Act, however, has suspended these RMDs for the rest of the calendar year to give retirement accounts the chance to bounce back from pandemic-related market downturn. Already taken out your 2020 RMD? You now have until August 31 to replace the funds.
While some of the rules governing tax-advantaged retirement savings accounts have been relaxed to provide more financial flexibility in this extraordinary time, prudence is recommended. It’s still wise to only take out as much as you absolutely need; not as much as you can.