Why You Shouldn’t Withdraw Money From Your Retirement Account Even Now
The coronavirus relief package that was signed last week included relaxed rules for withdrawing money from your retirement account. But while an option now exists for those looking for a financial lifeline, there are several considerations to keep in mind before starting to transfer money.
Let’s look at the changes first.
Rules for early withdrawal of funds from retirement accounts
You can receive up to $ 100,000 from your retirement account for “coronavirus-related” purposes. The normal 10% penalty will be waived. You have to do this before the end of the year.
If you replace the money within three years, you will not have to pay income tax on the amount. Otherwise, you have three years to pay taxes on this money.
You can also borrow up to $ 100,000 from your 401 (k) (or 403 (b) or other employer-sponsored account) instead of the usual $ 50,000. (You cannot take a loan from the IRA.)
This option is only available for 180 days after the law was passed on March 27, that is, at the end of September.
Generally, you cannot withdraw more than half of your balance, but this is suspended for this period. If you have a loan and must be repaid this year, you will have an additional year to repay the entire amount.
Who is eligible for early distribution without penalty?
The extended rules for early allocation apply to three categories of people:
- Those who have been diagnosed with coronavirus
- People who have a spouse or dependent with a diagnosis of coronavirus
- Anyone facing financial hardship due to coronavirus
In the third group, things get more complicated. Here’s what falls into the category of “financial hardship”:
- Quarantined
- Dismissal or dismissal
- Reducing working hours
- Inability to work due to lack of childcare
- Closing or reducing working hours for a business you own or work
- “Other factors identified by the finance minister”
“The interpretation is really vague,” said Whitney Morrison, CFP and director of financial advisory services at LegalZoom . “Most people can do it.”
This is your last resort
Before taking out a distribution or a loan from your bird’s egg, make sure that you have exhausted all other options.
“$ 100,000 is a lot,” Morrison warned. She said that while small business owners with a payroll to cover may need such an amount to keep them for that indefinite period, it could be risky for an individual to access that amount. “You could potentially eliminate your entire 401 (k),” she said.
“The market went down and it was really uneven,” Morrison said. “Any distribution you make right now, even if you pay back later, will consolidate this loss .”
While getting an allocation or loan is a better option than a high interest rate debt like a payday loan, Morrison said it should only be considered if you have no income, savings, family to help, or without. interest / low interest rate options. as a proposal to transfer the credit card balance.
“Don’t forget about the other resources available right now,” said Jorge Soriano, financial advisor and financial advisor to GTE Financial in Tampa. From your check to extended unemployment benefits to asking for housing for your mortgage or utilities: “Develop a way to pay [your bills] before withdrawing any money from your plan,” he said.
Morrison advised you not to overdo it because you’re worried you won’t have enough money to live on, or worse, because you’d rather have cash than wait out the volatile stock market. “Start small, and if you need more, take more later,” she said. Since loans are available until September and payouts are available until December, you can review your retirement funds if you need emergency assistance in the future.
A retirement distribution or loan does not require a credit check, which may make it a better option if you have bad credit. But even if you don’t have to pay fines and you have extra time to pay taxes, “you are still taking yourself out of the future,” Morrison warned.
The younger you are, the riskier you are
If you are in your 20s or 30s, you might think you have enough time to get back on track after you pulled money out of your graveyard. But Morrison warned that you can be your biggest flaw. “Think about what makes retirement accounts so powerful: a long time to grow and strengthen at the expense of compound interest,” she said. If you take money out of your 55-year-old retirement account, you won’t lose too much growth potential, while a 35-year-old person will miss out on growth potential for decades.
“Your retirement will hurt a lot when you leave when the markets have experienced such a huge pullback as we saw last month,” Soriano said. “It will be very difficult for you to return to this return.”
Take a look at a little math on this. Let’s say you start saving for retirement at age 25, saving $ 5,000 a year with a 5% yield (we’re very conservative here, kidding me).
That’s a good $ 604,000. But let’s say you started that account and then wiped it back down to $ 0 when you turned 29. Next year, you start saving again. You only lost five years of progress, right? True, but it’s more like five years plus the interest accrued over those five years and every year thereafter.
Yes, you’ve gone through tough times, but you’ve put your future at a $ 153,000 disadvantage.
If you do decide to accept the allocation now, “think about getting out of a position that hasn’t experienced a big fall,” Soriano said. This can be a cash IRA or a money market account. The more conservative the investment, the better you will be able to minimize losses when withdrawing cash.
Prepare for a Potential Tax Account
While you will not have to pay an early distribution penalty on the withdrawn money, you will still have to pay income tax on that money.
Morrison said that some firms automatically withhold 20% of your funds to cover taxes before giving the rest to you. If this doesn’t apply to your account, be sure to set aside at least 20% for taxes.
Soriano said that if you know your tax rate , this could be your guide to setting aside what you owe on these funds. If your tax rate is 24% and you take an allocation of $ 100,000, you must pay $ 24,000 in this payment.
“Keep this in a savings account and put it aside,” Morrison said. “If you end up spending that money in the future, you could potentially set a payment plan with the IRS” for the taxes you owe.
Talk to someone before you do this
While Morrison and Soriano agreed that retirement benefits should be your last resort, they also stressed the importance of talking to someone first. “A second pair of eyes always pays off,” Soriano said.
If you are already working with a financial planner, do not start filling out online forms late at night without informing them of your plans. Take time to sit down and discuss all your options. If you don’t have a consultant, inexpensive and free options are available during a pandemic.