Q: How does the Cares Act affect withdrawals from my retirement account?
A: If you are younger than 59½, you are ordinarily subject to a 10 percent early withdrawal penalty on top of the income tax owed on your withdrawal. But — if you have experienced financial hardship related to the pandemic — the Cares Act waives the 10 percent penalty for withdrawing money from IRAs and defined contribution plans, such as a 401(k) or 403(b).
Coronavirus-related distributions can be taken for the following reasons:
— You, your spouse or dependent has been diagnosed with the coronavirus.
— You’ve experienced adverse financial consequences as a result of being quarantined, furloughed or laid off, or your work hours have been reduced.
— You’re unable to work because of a lack of child care.
— You’ve had to close or reduce the hours of a business as a result of the virus.
— You’ve been financially impacted by other factors determined by the treasury secretary.
Be aware that the 10 percent waiver only covers withdrawals up to $100,000 made on or after Jan. 1. until Dec. 31, 2020.
Q: When will I have to pay taxes on my withdrawal?
A: To ease the tax burden, under the Cares Act you have up to three years to pay taxes on the withdrawal. You can repay all or a portion of the distribution within three years, and the repayments will not be counted toward the annual contribution limits. For 2020, the maximum contribution to a 401(k) or similar retirement plan is $19,500. If you’re 50 or older, you can also contribute an extra $6,500. The annual limit for an IRA is $6,000, with a $1,000 catch-up limit if you’re 50 or older.
Under the Cares Act, the withdrawal is also not subject to the mandatory withholding of 20 percent, says Andrew Westlin, a certified financial planner (CFP) at online financial adviser Betterment.
Q: Can I take out a loan from my retirement account?
A: The Cares Act allows certain changes to employer-sponsored retirement plans to help people impacted by the coronavirus. If your employer allows loans, the Cares Act increased the loan limit to $100,000 from $50,000. Additionally, it’s important to note that employers are not required to increase the loan limit.
Another provision allows you to borrow up to 100 percent of your vested amount. So for example, if you only have $30,000 in your 401(k), you can borrow up to that amount. The Cares Act has waived the rule that limits retirement plan participants to only borrowing up to 50 percent of their fully vested balance or up to $50,000, whichever is less. But again the loan limit has increased temporarily to $100,000.
Q: What if I can’t afford to make the loan payments during this crisis?
A: There’s further assistance in the Cares Act that allows workers to delay making payments on retirement account loans. Loan payments due between March 27 and Dec. 31 (included on an existing loan) can be deferred for a year. However, interest will continue to accrue, but the term of the loan will be extended accordingly, according to Betterment.
Q: Should I take a withdrawal or loan from my retirement plan?
A: These are extraordinary times, which call for extraordinary measures. Avoid tapping this resource, especially if you were already not saving enough for retirement. However, if you can’t make ends meet because your spouse has been laid off or furloughed and this how you can afford to pay your rent or mortgage, you have to do what you have to do. Just make this move your last resort.
Q: What should I do if my company cuts its matching contribution?
A: Nothing. If you’re already contributing, don’t change a thing. The match is a bonus. In fact, if you can afford it, increase your own contributions to make up for the lost employer match.
Yes, the matching contribution may have been the lure to persuade you to save for retirement. But its reduction or suspension does not change your need to save for your future retirement. In fact, the Secure Act, which passed in 2019, will require plan sponsors to provide workers with an annual disclosure showing what their monthly (and lifetime) income would be based on what they have saved. It will be a wake-up call for a lot of people.
So match or no match, save what you can.
Q: How does the Cares Act impact my 2020 Required Minimum Distribution or RMD?
A: You are required by law to take withdrawals from your IRA, SIMPLE IRA, SEP IRA or retirement plan such as a 401(k) once you reach the age of 72. (It was 70½ before 2020.) But the Cares Act waives RMD payments for 2020, including for inherited IRAs.