Note: the information presented herein is not to be considered individual financial advice. Contact us for an evaluation of your unique situation and personalized guidance.
The Coronavirus has wreaked havoc on the markets and disrupted many family’s incomes. This may leave limited options and have you considering using money you’ve parked in retirement plans or IRAs. There are important things to know while making an informed decision.
First and foremost, we understand this is a difficult decision. There are plenty of places you may turn that can make you feel “guilty” for considering this option. It would be advisable to only take what you need as you need it but we are here to help you navigate this with knowledge.
Your first thing to consider is your age: if you are under 59 1/2 years old the IRS will consider this an “early” distribution. What that means to you is that they add an additional 10% penalty in addition to your income taxes for taking money. Exceptions to the penalty apply for Disability, Death, Medical Expenses, First Time Home Purchases, Qualified Educational Expenses, 72(t) payments & Qualified Reservist Payments. There are also age 55 rules and Substantially Equal Periodic Payments (SEPP) that are written into the tax code to avoid the 10% penalty. For the details of these exceptions, visit the IRS website or contact us to discuss further. There have been calls for congress to waive the fee along with the current stimulus relief package but nothing has been passed as of this publication.
Regardless of your age, you will need to be aware that these distributions count as income for traditional IRAs & retirement plans. Therefore, as previously mentioned you will need to account for income tax and be mindful of crossing into new tax brackets. Should you have a Roth account your contributions will be tax-free but any earnings can be subject to income taxes and penalty.
Another consideration that you should have is the 60 Day Rollover. This is a 60 calendar day period to refund money taken from retirement accounts and avoid taxes/penalties. This can only be done once every rolling twelve months and it does not require a full refund. Any amounts returned in that time will be deducted from your 1099-R tax document.
Should you be displaced from work but have a spouse with an active retirement plan they may be able to take a 401(k) loan. In this case, you can take money (within plan guidelines) that you’ve saved in a 401k and pay it back to your account over the agreed upon timeline with after-tax money. In addition, you will not have any income tax or penalties involved on the withdrawal. You will pay interest as well as part of the contributions into the account. Should someone separate from the place of employment for the plan before paying it back they can either setup payments with the plan to continue (from your bank account) or choose to let the loan “default”. The default of the 401k loan will not have any burden on your credit but it will trigger the leftover balance to be considered income and potentially trigger the early withdrawal penalty.
There are many options as well as considerations to take into account. We certainly understand that it can be difficult to navigate alone and are here to assist you.