How to take money out of your IRA & 401(k) account during the COVID-19 crisis
Last week the President signed the CARES Act into law. The goal of this legislation was to help get money into the hands of employers and employees who are affected by the economic slowdown caused by the coronavirus crisis.
Like everything in government, it’s ALOT of information. The CARES Act contains over 100 different sections and over 500 pages. Below are answers to some of the questions that you might have regarding your IRA or 401(k) accounts.
Can I take money from my IRA to get through this economic slowdown?
Yes. The CARES Act waives the 10% early withdrawal penalty for an IRA withdrawal. So you are free and clear to withdraw up to $100,000 from your IRA and not be penalized. Now, you will still owe income tax on that withdrawal taxed at your ordinary income tax bracket. But there are conditions, this provision is for people who have been affected by the coronavirus – either you’ve gotten sick, or your spouse has, or one of you has lost your job, or your business has been impacted.
This probably applies to pretty much everyone, to varying degrees, but be prepared to have to show this if you’re using the money.
Can I put the money back if I end up not using it?
Yes! So, let’s say you’re in the 22% tax bracket – you’ll owe 22% on the amount you’ve withdrawn ($22,000 on a $100,000 withdrawal) BUT, you’ll have three years to pay the taxes off. So you can split it up equally between 2020, 2021 and 2022. Additionally, you can return cash to your IRA from this early withdrawal whenever you want over the next three years to avoid owing the taxes pro-rata.
What about 401k’s?
Investors with 401(k) accounts have a choice. You have the option of taking a distribution up to $100,000 or a loan up to the same amount. The CARES Act expanded the size of the loan you can take from your 401(k) or similar retirement plan. Now, the borrowing limit has been raised from $50,000 to $100,000. The 10% penalty for 401(k) distributions has also been waived, just like for IRA owners. If you choose to take a distribution from a 401(k), you also have three years to repay the loan or distribution to minimize what you owe in income tax.
Can I freeze my Required Minimum Distributions if I don’t want to sell stocks that are down?
Yes! Investors over the age of 72 have been given a waiver to halt RMDs through 2020. Which means you can wait to take money out of an IRA (or other qualified plan account) until next year. We’ve had clients ask us whether or not this includes beneficial IRAs that have been inherited from deceased parents. We’re still waiting for definitive guidance on that, so we’re telling them to hold off before taking these distributions for now. If you have already taken your RMD, you may be able to just roll that amount back into your IRA.
If your business is hurting or you have bills coming in with no way to pay them, using an early withdrawal from your IRA is smart, provided you have a plan to return those funds to the account as soon as possible to avoid owing the taxes. This one-time waiver of the 10% penalty makes it less painful to do.
If the value of your retirement account has fallen and you do not want to sell your stocks to take required minimum distributions, well, you got a pass this year. Hopefully things will have recovered in time for your 2021 RMD.