Withdrawing Money From Your Retirement Account Just Got Easier
When the CARES Act was passed in March, it became easier for people to access money in their retirement accounts if they faced financial hardship due to the coronavirus pandemic. Last week, the IRS announced that it has expanded the rules governing who can withdraw funds from their tax-free accounts without penalties.
Before we move on to the update, let’s take a look at the temporary changes that CARES has made to retirement withdrawals due to coronavirus:
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.
That deadline, to be precise, is September 22nd.
The IRS is now expanding the temporary benefit to include more reasons why you may be under financial pressure from the pandemic and related closure efforts.
Previously, if you, your partner or dependent were not diagnosed with the coronavirus, your difficulties had to be related to quarantine, vacation or layoffs, reduced working hours or inability to work due to lack of childcare. But you may also be eligible due to “other factors determined by the finance minister.”
Now, good reasons also include lowering your wages, canceling your job offer, and postponing your start date.
If any of the above happens to your spouse or other family member, you also have the right to withdraw funds from your own accounts. Previously, the economic effect was supposed to directly affect your own income.
The announcement could be helpful for families who see the ongoing impact of the coronavirus on their ability to earn or maintain a reasonable income. But, as we said earlier, you need to consider this step carefully before withdrawing funds.
While you won’t pay the early withdrawal penalty , you will have to pay taxes if you don’t fund your account within three years. So if you make it to the end of that three-year period and don’t reach your financial goals, you will be on the hook for that income tax.
There is also lost portfolio growth. Of course, if you’re in dire straits and need money today, you’re rightfully more anxious about putting food on the table today than comfortably retiring in the future.
So if you’re thinking about going this route to make ends meet, be realistic about what you think your finances will look like in three, six, or 12 months. Do you think that your financial situation is temporary, or you could be unemployed or receive a reduced salary for some time? In any case, if you start the withdrawal process, you will need to prepare a top-up plan as soon as you reach calmer waters.