First, let me say that this is general advice. Your situation is unique, and we will tailor our guidance around your particular circumstances.
Did you know that the CARES Act waives the 10% penalty for withdrawing from an IRA or an employer-sponsored plan prior to turning 59½? It does, and it goes further.
Circumstances that allow for favorable treatment include the following:
- You, your spouse, or dependent, has been diagnosed with the coronavirus.
- You have lost income because you have been quarantined, laid off or have had work hours reduced due to the coronavirus.
- Your business has closed or you’ve reduced your hours because of COVID-19.
- You can’t work because you lack childcare due to the disease.
- The maximum withdrawal in 2020 is $100,000. There are no limitations on how the money may be used.
It’s the equivalent of an interest-free loan from your retirement plan, as long as you pay it back. Does it sound too good to be true? It might be.
Let’s consider some risks.
- You are forced to sell assets in your retirement account at a lower price. When you repay the distribution, you may be forced to repurchase securities at a higher price.
- Will you really pay it back? I know it is your intent to roll the cash back into your IRA, continue saving for retirement, and avoid the taxes, but given human nature, many won’t. And they’ll sacrifice longer-term goals and pay a steep price in taxes.
Think about it this way. If you take a $50,000 distribution and you are in the 24% tax bracket, you’ll pay $12,000 in federal income taxes (plus state income taxes).
When might it make sense to dip into your retirement fund? Well, you’ve exhausted all other sources, including unemployment benefits, government grants and loans, and even forbearance on your mortgage.
I recognized this is a difficult time. If you are the victim of an unexpected financial hardship, you are not alone. Let’s talk and put together a plan of action. We can help you tap sources of assistance that may make sense before digging into your retirement savings.
Just talking about it and putting a plan in place will be empowering and help reduce stress.
Finally, the IRS will provide additional guidance, and there are details that may need to be managed, but we are here to provide you with options.