The COVID-19 virus has changed our lives, at least for the short run, in impactful ways. As financial advisors, none more pressing than the changes it has created in regards to retirement planning and rules around retirement accounts. At least for now, these changes create unique opportunities in the year 2020 and we’ll certainly keep you up to date, if Congress decides to make anything permanent. During our last newsletter we talked about the fact that Required Minimum Distributions have been eliminated in the year 2020. That is important if you are someone over the age of 72. However, some of the other provisions could impact you regardless of age. Let’s take a look…
Retirement Account Distributions
Typically one needs to be age 59 ½ or older to be able to pull money from a retirement account (IRA or company sponsored retirement plan) however for the rest of this year (and retroactively for anyone that may have taken a distribution in 2020) you can a avoid the 10% early withdrawal penalty, on up to $100,000, if you meet one of the following two qualifications:
You, your spouse, or your dependent is diagnosed with COVID-19.
You have suffered financial hardships or consequences as a result of the pandemic. This would typically be someone who has lost or had their income reduced, not been able to work because of lack of childcare or a myriad of other reasons why someone could have had a negative financial impact.
Realistically there are probably very few people that haven’t been financially impacted, even if minimally, by COVID-19.
401(k) Loans
Participants in company sponsored retirement plans now have the ability to borrow at a much higher amount that historically has been allowed. Normally a plan will allow you to borrow up to 50% of your balance or $50,000, whichever is lower. However the CARES Act has increased that amount to $100,000 or 100% of your balance, which is lower.
What Should I do?
Dave Ramsey, America’s Voice on Money, always says, retirement plan distributions should only be used in the event that someone is trying to fend off foreclosure or bankruptcy and we tend to agree. Why is this? When you take a distribution from your retirement account you are satisfying a need today at the expense of your future. A $100 distribution today, at an 8% return, over 20 years means you actually took $466.10 from your future self. If you didn’t contribute again for another 5 years it would take a $146.93 deposit to make up for the unplugged $100 over the last five years. Many times, a retirement plan distribution can seem like an easy way to satisfy a current need when you can often satisfy that need another way.
If you’re using it to make a payment on a loan – call the lender. Right now, many lenders are willing to waive a payment or two if you have lost your income. They learned in 2008, it’s better to work with a borrower than face the wrath of an angry government and public because you foreclosed, evicted or repossessed from too many clients.
If you need income to survive – right now on OhioMeansJobs.com, which is a site hosted by Monster Jobs there are 116,135 jobs open in the State of Ohio. Many are probably not glamorous but if it’s the difference from pulling out your future retirement savings or rolling up your sleeves for a bit and doing something you may not enjoy, to keep your Retire Inspired Dream alive – I know what I’d be doing. I recently met with a young man, who works all day and spends his evening delivering pizzas for Pizza Hut. The classic gazelle intense Ramsey follower. When COVID-19 hit the fan he was furloughed but guess what, Pizza Hut was ready and willing to give him more shifts and he still has income to protect the four walls and we haven’t had to touch any of his retirement accounts.
401(k) Loans – When taking from a 401(k) you are paying yourself the interest back into your 401(k) account but you have unplugged an investment that, in many cases, has performed at a higher rate of return than the very low interest rate you are paying yourself. Not only that but you are unplugging the investment (for the purpose of the loan) at the very worst time because of point number 4.
Depressed Values – Any distribution right now is more than likely being taken at a level that is far from the highs. As we saw during the last few weeks the stock market can jump back up just as quickly as it went down. An old investor adage is to buy low and sell high. Right now, for many people, they are most likely selling low to take a distribution, so in most cases it would be advisable to try and avoid the distribution or loan.
BOTTOM LINE
While changes are coming to the retirement landscape, our advice is to stay the course. Keep focused on your Baby Step and only use the CARES ACT changes should you be in a situation where a retirement distribution is unavoidable. Should you need to talk through your specific situation please contact your Whitaker-Myers Wealth Managers Smartvestor Pro today!
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