Licensed and in need of money? Do you want a boat? Couple can withdraw $ 400,000 from retirement accounts without penalty under COVID-19 tax break
With more than 16 million Americans having filed for unemployment assistance in the past three weeks, it’s likely that many needy people will be looking near their retirement accounts for cash – taking out loans or pure and simple distributions. Fidelity Investments has already seen 401 (k) direct lender loans increase slightly in the first quarter of 2020 compared to the same period last year.
Now, as part of the recent $ 2 trillion stimulus package, the CARES Act, Congress has opened the door to withdrawing huge sums from these accounts by increasing loan limits and removing the normal withdrawal penalty. 10% advance for distributions. In total, a couple with their own accounts could take $ 400,000 in a combination of loans and withdrawals.
“I hear people talk about taking money out of their retirement account to buy a boat. You’re going to enjoy the boat, but you’re not going to be happy when you’re 65 and living just on Social Security, ”says Terry Briggs, benefits lawyer with Bowditch & Dewey in Worcester, Massachusetts.
“It’s for people who have no other alternative,” says Alicia Munnell, director of the Center for Retirement Research at Boston College. “People haven’t saved as much for retirement. If you can, keep it. Keep it in there.
If you’re in need or really want a boat the law doesn’t limit how you use the money, here’s the truth about the new rules.
Are you eligible for the new temporary rules? You are automatically eligible if you, a spouse or a dependent have tested positive for COVID-19 or if you have been affected more broadly. The definition of who this applies includes anyone who suffers “negative financial consequences” as a result of being quarantined, on leave or layoff or reduced working hours, inability to work due to lack of child care or the closure or reduction of hours of a business you own and operate.
The changes to Rule 401 (k) are permissive – employers don’t have to implement them – but Fidelity says for the work plans it administers, it expects the vast majority to ‘between them adopt the new rules. are allowed to accept what you say without investigating, ”Briggs says.
Normally, a penalty of 10% applies to withdrawals from retirement accounts made before reaching 59 1/2, with some exceptions. Under the new rules, COVID-19 issues essentially become a new temporary exception. You can receive up to $ 100,000 in distribution from a 401 (k) or similar workplace pension plan and / or an individual retirement account (ie $ 100,000 in total) during the 2020 calendar year, and if you are under 59 1/2, the 10% penalty is waived. You will still owe income taxes on the withdrawal, but you have three years to pay the taxes. Normally, the distribution counts as income for the tax year in which you withdraw the money. Distributions are also not subject to the normal 20% federal withholding tax for retirement account distributions.
If your financial situation improves, you can essentially reverse your withdrawal. You have three years, instead of the usual 60 days, from the date of distribution to re-deposit the money. If you have already paid the income tax due, you can recover it via a corrected tax return.
What if we took a loan? You can’t borrow from an IRA, but most 401 (k) allow loans. Under the new rules, until September 23, you can borrow 100% of your account balance up to $ 100,000 (less outstanding loans). This is more than the normal limits which allow you to borrow the lesser of 50% of your account balance or $ 50,000.
If you have 401 (k) loans outstanding, you can suspend payments due between March 27 and December 31 for one year. Then once you start paying again, you have an additional year to pay it off.
If you ask HR questions about this, they’ll likely refer you to customer service at the company that manages your pension plan. Find out about fee waivers. Avant-garde
and Voya Financial
both said they were waiving fees associated with COVID-19 pension plan withdrawals and loans. Fidelity says it does not charge fees for distributions related to COVID-19.
Keep in mind that once you quit a job, your 401 (k) is up to you to do whatever you want. You will receive an information pack required by the Ministry of Labor outlining the options. You can keep your 401 (k) in place with your former employer, transfer it to an IRA, or dump it and pay taxes on the distribution. Another option, if you get a new job: replace your old 401 (k) with the new one and keep saving.
Update: for more details, see IRS publishes FAQ on IRA and COVID-19 and 401 (k) loans and distributions.
See also: Should you take Social Security earlier than expected if you are made redundant due to COVID-19?, 401 (k) Smart Moves and Mistakes in the COVID-19 Economy and Congress suspends minimum distributions required for 401 (k) and IRAs for 2020, opening door to tax savings.