Tapping Into Retirement Accounts If Not Directly Impacted By COVID-19

The recently-­‐enacted Coronavirus Aid, Relief, and  Economic Security Act (CARES  Act) signed by President Trump  on  March  27, 2020, allows  “qualified individuals” to take up  to  $100,000 of  penalty-­‐free IRA and company plan withdrawals during 2020. “Qualified individuals” include those who are (or whose family members are) sickened by the virus or who have virus-­‐related adverse financial consequences.

But what if you are lucky enough not to be a “qualified individual,” but still have extraordinary bills to pay? You should always look first to other non-­‐retirement plan savings to pay your expenses. Any IRA or company plan savings you tap into will mean less available funds at retirement. The next source of savings should be your IRAs. IRA withdrawals are easier and faster than company plan distributions.

The last resort should be your company plan accounts. If your plan offers loans, you may want to consider that option. You can borrow up to 50% of your account balance, but no more than $50,000 (minus any outstanding loans). Plan loans don’t require a credit check, and the application process is normally simple and quick. In addition, a plan loan isn’t a taxable distribution, and repayments are made back to your account – not to a bank.

However,  borrowing  against  your  account  reduces  the  tax-­‐deferred  savings  that  you  may  need  for retirement. And, if you terminate employment with an outstanding loan, you may be taxed on the entire outstanding loan balance.

If your plan doesn’t offer loans or you don’t want to take on more debt, you should check to see if your plan offers  in-­service  withdrawals.  Many plans offer withdrawals for any reason at age 59½ and hardship withdrawals at any age.

Generally, hardship withdrawals are allowed if you can satisfy one of the IRS “safe harbor” criteria. These include medical expenses, educational expenses, payments necessary to prevent eviction or mortgage foreclosure, and burial or funeral expenses. Also included are expenses and losses (including the loss of income) incurred on account of a disaster if you live or work in a FEMA-­‐designated disaster area. Every state has now been designated a disaster area because of the coronavirus. So, you should be eligible for a disaster hardship withdrawal if your plan allows them. However, keep in mind that any hardship withdrawal cannot be more than is necessary to pay your financial expense.

Any withdrawal of pre-­tax accounts will be taxable and, if you are under age 59 ½, will normally be subject to the 10% early distribution penalty.

As with loans, if considering a withdrawal, you must carefully weigh the need for these funds against the loss of tax-­‐deferred growth in your savings plan account.