Try not to be jealous, but I was researching how The SECURE Act, which took effect this year, alters estate planning strategies for tax-deferred retirement accounts. I know, incredibly exciting. I confess that I had to take a few deep breaths and calm down when I got to “eligible designated beneficiaries.” But, in the process, I ran across some information that may help some families who are struggling to deal with the upheaval Covid-19 is wreaking right now. So, I wanted to pass the information along since most media coverage has focused on the $1,200 of stimulus money, the PPP loan program and the EIDL loans.
Congress has waived the 10% penalty for early withdrawals from retirement accounts under certain circumstances.
Ordinarily, if you have money in a tax-deferred retirement account and you withdraw any of that money before age 59 ½ you have to pay a 10% penalty. However, there are a few new provisions that will allow families to use funds in tax-deferred retirement accounts (like traditional IRA’s or 401k’s) without incurring the usual 10% early withdrawal penalty under certain circumstances. This list is not exhaustive, but, I was previously unaware of these two waivers so I wanted to share.
Covid Related Hardship:
The CARES Act, which was passed in response to Covid-19, allows individuals who have suffered hardship as a result of the pandemic to withdraw up to $100,000.00 from tax deferred retirement accounts without paying the standard 10% penalty that is normally assessed on early withdrawals. The list of hardships include:
- Being diagnosed with Covid-19
- Having a spouse or dependent that is diagnosed with Covid-19
- Financial hardship related to Covid-19, which includes things like:
- Loss of job
- Closure of a business
- Loss of childcare
As for the first two, I was rolling my eyes too. If you can find a test, let me know. But, the third category seems more widely applicable. I am not sure what the vetting process will look like since this is brand new legislation, but, I know so many families that would probably qualify. And since you would be withdrawing your own money, you won’t have to wait around for anybody to sign and mail your check.
Under the SECURE Act, taxpayers can withdraw up to $5,000 from a retirement account without incurring the 10% penalty within one year of having a new baby or adopting a child. This is done on a per tax-payer basis so if both parents have tax-deferred retirement accounts, they can each withdraw $5,000.00. Also, this can be done for each new child, not just the first child. Finally, this provision is not related to Covid-19, so it is available to everyone. Even the president of Drizzy, who is probably crushing it in the revenue department right now, can take advantage of this waiver (if you are unaware Drizzly will deliver alcohol right to your door, usually within an hour . . . no, I was not paid for this endorsement).
BUT WAIT! There are serious drawbacks to raiding your retirement accounts:
There is no such thing as a free lunch, as they say. So, you will have to weigh the pros and cons of taking advantage of these waivers.
You Have to Pay Income Tax on the Withdrawal.
First, you will have to pay income taxes on the money that comes out. Uncle Sam let you put that hard-earned money in that tax-deferred account without taxing it. So, you can bet he is going to get his on the back end. However, if you are really struggling, you are likely to be in a fairly low tax bracket in 2020 and under the Covid-19 waiver, you are allowed to spread those tax payments over the next three years.
“If you spend it now, it’s not available for retirement.” – Captain Obvious
If you spend through your retirement savings and don’t make up for it in the coming years, you may be delaying or compromising your retirement. So, if you don’t really NEED to take the money out, maybe don’t use this as an excuse to put in a pool or buy a new car. The good news is that under both programs, you are allowed to put the money back into your retirement accounts without those repayments taking away from the annual caps that apply to tax deferred retirement savings. All I am saying is that if you are dealing with a job loss, no childcare, reduced hours or difficulty keeping a business afloat and you are looking at having to move in with your in-laws, you at least won’t have to pay the 10% penalty if you need to pull some money to get through this.
The Double Whammy
On a related note, if your financial advisor isn’t a literal wizard, you have likely lost a lot of value in the last few months. I know that I am personally taking a really adult approach. I barely look at my statements out of one squinty eye when they come in the mail these days and immediately shred them. Taking money out and spending it now, when the market is down, can be extra detrimental.
Assuming the market goes back up, you will miss out on those gains also. But, then again, who knows where the bottom is yet?!? Maybe we should all just drain whatever accounts we have, buy an old school bus and outfit it for Mad Max: Fury Road style, post-apocalyptic battle. But, something tells me I will not look as good as Charlize Theron with a shaved head. Also, if things calm down and we have a rusty school bus in our yard filled with a colony of “Murder Hornets” I would probably regret it.
But, all joking aside, if taking some money out of your retirement account right now is going to turn a grim financial hardship into a temporary setback, you may want to consider using these penalty waivers to take the edge off.
Normally this is the part of the blog where I say “Call the Law Office of Keenan Copple PC today, and I will help you with X,Y or Z.” Of course if you have estate planning questions, give me a call at (303) 819-6415. But, for early retirement account withdrawals, you should check with your financial advisor or tax professional so you fully understand the short and long term ramifications. I hope you and yours are staying safe and healthy.