On the Czarnowski & Beer blog we’ve been sharing a lot of helpful tips and information for cooperatives and condominiums to use in an effort to reduce the harmful effects caused by COVID-19, but our wealth of knowledge doesn’t end there.
One of the personal forms of assistance available as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to Americans who are struggling with financial hardship due to the coronavirus pandemic is that they can withdraw money from their retirement accounts without the usual penalty, with the option to pay any tax owed over three years. The Act also relaxes rules on taking out loans against a 401(k) savings plan.
The fallout from the crisis has left people scrambling to pay their bills after being furloughed, getting laid off, or having hours reduced. We know that withdrawing from your IRA is a controversial topic, but if you need the money and it’s the only money you have, you may have little choice. Realize though, if you are younger than age 59 you are only being afforded a savings of 10% of the amount you withdraw – meaning you will still owe income tax on the amount withdrawn. On the other hand, no matter your age you have up to three years to pay any tax due on the withdrawal.
All things considered, it may be more attractive to borrow money from your 401(k), assuming your plan has a loan option available. The Act increases the loan amount available from the lesser of $50,000 or 50% of your account balance to the lesser of $100,000 or 100% of your account balance. Note that your employer must adopt these changes to the plan to enable you to take advantage of them.
If you are unfortunately out of work for a long period you will most likely find that you pay a lower income tax rate as well, but we typically advise against taking withdrawals from your retirement accounts prematurely. You should access these funds as a last resort – these days, it takes a lifetime to accumulate retirement savings.
Ultimately, although the options exist we advise you to do your best to evaluate all of your options including family, friends, selling off personal items, etc., before considering whether to withdraw money from such funds. Think long and hard about ANY other sources of savings to access first and leave withdrawing money from retirement funds as a last resort.
The Czar Beer team is dedicated to providing timely, accurate information on all aspects of the CARES Act and the current economic crisis that affect our clients. However, as this is all developing quickly we are here to offer support in any way we can. You can email us at firstname.lastname@example.org or call 212 397 2970 with any questions you may have.