Accessing your retirement funds

The coronavirus has adversely impacted millions of Americans from a financial perspective.

From losing jobs, to investment losses, to significant delays in receiving unemployment compensation, many people are feeling a significant financial pinch as a result of the economic slowdown brought about by the coronavirus pandemic. Under the Coronavirus Aid, Relief and Economic Security Act, commonly referred to as the CARES Act, that was enacted on March 27, 2020, there were a number of provisions designed to help affected taxpayers during these challenging times.

Essentially Congress liberalized the distribution and participant loan provisions that are traditionally in place for most tax deferred retirement plans such as 401(k) plans, profit sharing plans and Section 403(b) plans.

These special rules relate to distributions of up to the lesser of $100,000 or the participant’s vested balance which occur between Jan. 1, 2020, and Dec. 30, 2020. The distributions for participants under age 59 ½ during this timeframe to qualified individuals are no longer subject to the 10% penalty for early distribution.

A qualifying individual includes the following: A participants who is diagnosed with COVID-19 under an approved test; the spouse or dependent of a participant that is diagnosed with the virus under an approved test; or a participant who experiences adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced due to the virus, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to the virus or disease, or other factors as determined by the Secretary of the Treasury or their designee.

In today’s situation it would be few and far between that cannot qualify based on this broad definition.

The plan administrator will rely upon the participant’s certification that they are a qualified individual based on the conditions above. Federal income tax withholding on the distribution is optional.

In addition, all or part of the distribution can be repaid back into the plan or another plan or IRA during a three-year period after the distribution. Earnings on the distribution cannot be re-contributed back into a retirement plan. Any portion that is re-contributed back into the plan would not be subject to income taxes as well. Repayments can be made in multiple payments and do not need to be made in one lump sum.

The loan provisions from qualifying retirement plans have also been modified to increase the maximum loan size for an individual from a qualified plan from $50,000 to $100,000 and from 50% of the participant’s vested balance up to 100% of the participant’s vested balance.

This modified loan provision applies from loans made between March 27, 2020, and Sept. 22, 2020. A qualifying individual can also defer for up to one year any payments on the loan. Subsequent payments may be adjusted and interest on this loan will continue to accrue.

This extension provision applies to retirement plan loans outstanding prior to March 27, 2020. When a taxpayer borrows against their retirement funds or makes an early distribution this can have significant long-term impacts on their future retirement savings.

Normally, I would highly recommend against this type of strategy. In our current situation desperate times sometimes call for desperate actions, and although I still would tread very cautiously in borrowing against or taking an early distribution from the retirement savings, the current unprecedented circumstances may necessitate this strategy as a means of survival for some in the short term.

I would highly encourage people to have a plan and to weigh both the short- and long-term consequences of tapping into their retirement savings at an early age.

Congress has taken a number of steps to ease the burden that we all are feeling through the CARES Act and the stimulus money that was distributed. We all may have to adjust our lifestyle in both the short and long term. Accessing retirement funds early is worth consideration, but be cautious in regards to the future implications for your eventual retirement.

In our current situation desperate times sometimes call for desperate actions, and although I still would tread very cautiously in borrowing against or taking an early distribution from the retirement savings, the current unprecedented circumstances may necessitate this strategy as a means of survival for some in the short term.