Tapping Into Retirement Funds

Throughout the “Great Recession” many individuals were forced to withdraw from their retirement plans prior to reaching 59 ½ to get through hard times. It was a tough time where we saw people losing their jobs, cars, and homes. Dipping into their retirement assets was sometimes a choice between incurring more debt or doing what seemed obvious in not taking on debt.

Unfortunately, taking early distributions from retirement accounts creates serious tax implications. All withdrawals from tax deferred accounts are taxed at ordinary income levels which means it also increases your taxable income. Sometimes this causes a domino effect which is not so obvious. Increasing your taxable income could mean you will not qualify for other tax benefits (Child tax credit, business expense deductions, etc.) you were used to. What a slap in the face right?!? But wait there is more (infomercial voice), since this was an early withdrawal it also means there were subject to the 10% early withdrawal tax penalty. So NOW, this poor sap got slapped in the face for the tax on his IRA, let’s call it 18%, add a punch in the gut for the 10% penalty, and a kick in the groin by way of taking away possible tax deductions! Who’s a good boy??? The IRS is a good boy…

Thankfully, the CARES Act just recently passed has included ways to help people in distress during these Covid-19 days of our lives. This is what the CARES Act allows:

• Investors of any age can take out a “coronavirus-related distribution” of as much as $100,000 or up to 100% of the balance, whichever is less.
• Increases maximum loans from qualified plans from $50,000 or 50% to the same as mentioned above.
• Distributions may be repaid in the same amount over a 3-year period and all tax will be avoided.
• Tax on the distributions not repaid will be included in gross income over a “3-taxable-year” period.
• All penalties will be waived for any “Coronavirus-related distribution” made in between January 1st, 2020 to December 31st, 2020
• Required Minimum Distributions will be waived for the calendar year of 2020

What this means to anyone needing to take money out of their retirement accounts is two-fold. One, no penalties if you meet the “coronavirus-related distribution” criteria. Two, the tax on the distributions will be spread out over 3 years. So, what is the “coronavirus-related distribution” criteria? Here ya go…

• Anyone diagnosed with COVID-19 is a test approved by the CDC.
• Anyone whose spouse or dependent is diagnosed.
• Anyone furloughed, laid off, or unable to work due to a lack of childcare due to such a virus.
• Anyone closing or reducing the income of a business owned or operated due to such a virus.

Other options you may have within your retirement accounts may be loans, in-service distributions, and hardship withdrawals. These all vary depending on what type of retirement account you have, and the rules mandated by the plan document of the retirement account.

You should still seek the advice of an accountant and/or a financial consultant prior to making any such withdrawals, but the great thing is this will give you, and your employee’s options if all of the other roads to recovery lead to a dead end.