The following first appeared on Money & Markets.
If you’re reading this, I hope you’re still employed or that your business hasn’t been too badly disrupted. I’ve been impressed by the ability of millions of Americans to carry on business as usual despite the stay-at-home orders and closure of offices. It’s a testament both to modern technology and to the get-it-done spirit of America’s business owners and workers.
I’ve lost count of the number of business calls I’ve been on with crying babies, barking dogs or screaming Peruvian mothers-in-law in the background (OK, so that last one might be specific to me as I’m stuck in Peru). But business is still getting done even under those conditions, which is commendable. Unfortunately, there are still a lot of people hurting financially and looking for liquidity where they can find it. And some are naturally looking to their retirement accounts for lack of other options.
I don’t like to give our fearless leaders in congress and the White House credit for much. In fact, I’m generally happy to throw all of them under the bus. But they did throw us a few bones in the CARES Act that directly affect retirement planning. The longer this crisis lasts, the more relevant some of these options will be.
Let’s jump into some of the highlights.
Retirement Planning Amid the COVID-19 Pandemic
No RMDs in 2020
If you are over 70 ½, as part of your retirement planning you should already know you’re required to take required minimum distributions (RMDs) from your IRA or 401(k) plan.
Well, the CARES Act waives RMD requirements for this year. So, if you don’t need to take an RMD this year because you have liquid savings in a bank account or regular taxable brokerage account you can live on, it’s really better if you don’t. Every dollar you take out of your IRA is a dollar you have to pay taxes on. Keeping the cash in the retirement plan for another year kicks the tax liability into a later tax year.
Ultimately, you’re still going to pay the taxes. You know Ben Franklin’s quip: The only two certainties in life are death and taxes. But as far as I am concerned, a dollar in taxes postponed to a later tax year is a dollar saved.
Retirement Plan Emergency Distributions
If you don’t need to take distributions, great! But not everyone is in that situation. If you’re out of work or your business is shuttered due to the coronavirus closures, you may be looking for cash anywhere you can get it.
The CARES Act allows us to withdraw $100,000 per taxpayer without the customary 10% penalty that is levied if you’re younger than 59 ½. And if you pay back, or “recontribute” the funds in your retirement plan within the next three years, there are no tax consequences either.
The criteria here is pretty loose. In order to qualify for this hardship distribution, you have to have a member of your immediate family diagnosed with COVID-19, or you have to have suffered a financial setback due to virus and associated closures. I don’t claim to speak for the IRS, but I’m guessing they’re not going to check all that hard. If you claim to be suffering hardship, that’s likely evidence enough.
Additionally, you can potentially borrow more from your 401(k) retirement plan. Previously, the limits were the lesser of $50,000 or 50% of the account balance. The limit is now the lesser of $100,000 or 100% of the plan’s balance.
But Should You?
Here’s the rub. While you might be eligible to take funds out of your retirement plan, it doesn’t necessarily mean you should.
Remember, IRAs and 401(k) retirement plans are generally untouchable by creditors in the event of bankruptcy. The worst thing you could do would be to liquidate your retirement plan to support your business, only to have it fail in another three months if conditions don’t approve.
Should you be forced to declare bankruptcy – and let’s face it, a lot of people will be in that situation through no fault of their own – it’s better to keep your retirement accounts off limits.
Furthermore, remember that you’re not the only person suffering right now. If you’re having a hard time making rent or payroll, try negotiating with your landlord or bank. They might not like it, but you won’t be the first person to ask them for help. It’s better to leave your retirement plan intact and deal with an angry landlord or banker than liquidate it and still deal with the same angry landlord or banker a few months later.
There’s also the government. The Paycheck Protection Plan (PPP) hasn’t gone as smoothly as we might like, and it’s already out of money. But it’s a foregone conclusion that the program will be restarted. If you think you might quality, call your bank and start the paperwork now so that you’ll be ready once the plan is given fresh funds.
And if, after all that, you still need to dip into your retirement account … well, do what you need to do. It’s rough out there.
Just make sure you keep this as your absolute last resort. You’ve worked too hard for it to risk exhausting it now.
This article first appeared as Retirement Planning in the Middle of a Pandemic.