Earlier this month Investor’s Daily published the results of a survey regarding the Coronavirus pandemic. Sixty percent of the respondents believed the Covid-19 crisis would have a significant adverse impact on their retirement savings.
If you’re out of a job, putting food on the table probably takes priority over saving for retirement. Many of those fortunate enough to maintain their jobs, saw their employer either suspend or reduce the employer match on their 401(k).
Is it surprising that a pandemic that shuts down the country would create havoc with a person’s retirement savings strategy? Not at all.
To help combat the economic impact of the virus, the government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
I believe the stimulus checks and some of the tax changes included in the CARES Act deserve further discussion.
As the survey indicated, the virus has thrown a wrench into many financial plans. I’m a firm believer that, if at all possible, you should not tap into your retirement savings before you retire. It may be convenient to do so, but there are other alternatives you might consider. A home equity line of credit, for example.
The CARES Act has eased the rules for 401(k) hardship withdrawals. In the past, if you took a hardship withdrawal prior to age 59½, the 10 percent early withdrawal fee would be waived, although you would still have to pay income tax on the entire amount withdrawn.
With the CARES Act, if you were diagnosed with the coronavirus or lost your job because of the pandemic, there are some slight modifications. The early withdrawal penalty is still waived and taxes still have to be paid, but you now have up to three years to pay them.
Most 401(k) programs also permit loans. In essence, Uncle Sam doubled the old loan rules. You can now borrow up to $100,000 of your vested account balance or 100 percent of your balance if it’s less than $100,000. In a twist that will complicate matters for retirement plan administrators, the loan interest is paid back to yourself.
There are many more changes included in the CARES Act. For instance, if the pandemic has you working at home, your new home office is not tax deductible. The Act also clarifies how to treat facemasks. The cost isn’t deductible but you can use funds from your flexible spending or health savings account to buy them.
There are also a number of tax changes fueled by the COVID-19 crisis. The CARES Act stipulates that stimulus checks are not taxable but unemployment benefits are subject to taxation. Details on how much of your unemployment is taxable will be on form 1099 which you will receive when 2020 tax documents are sent out.
Even though it may be convenient, I urge you not to dip into your retirement savings if it can be avoided. If it can’t, I also strongly recommend consulting a tax professional before deciding to travel down a slippery slope and withdraw funds from your retirement savings.
Although well intentioned, the rules are overly complex. You need to get specific details on how tapping into your retirement program will impact your tax returns.
Remember, retirement dollars are not an emergency fund. They are intended for your retirement.