A Tax Break For Tough Times

Coronavirus is teaching everyone about tough times. And, for those of you who’ve had the wherewithal, the discipline and the foresight to establish a retirement plan to make smooth sailing of your golden years, you’re probably feeling pretty fortunate now that you have that nest egg. Times might be tough, but not unbearable. Maybe you are among the many people having to raid their retirement plans just to make ends meet and in some cases to put food on the table. But, keep in mind that far too many families do not have that safety net.

Fortunately Uncle Sam has made provisions due to the challenges created by COVID-19 for those of you who do have retirement plans to raid.  Here are some of the details of those provisions.

You Can Pay Back Withdrawn Funds

As part of the CARES Act, qualified individuals impacted by the coronavirus pandemic can pay back funds withdrawn from a qualified retirement plan over a three-year period. In ordinary circumstances, if you were to take a hardship withdrawal from your retirement plan, you would permanently reduce your balance.  You would not be allowed to put the money withdrawn back in your retirement account once the hardship had passed. And, depending on your company’s policies, you also might not be able to resume contributing for six months or more. Of course, this may or may not be a consideration if you are no longer employed.

10% Early Withdrawal Penalty Waived

The new law also temporarily waives the 10 percent early withdrawal penalty for coronavirus-related distributions (CRDs) made between January 1 and December 31, 2020.  In addition, the CARES Act exempts CRDs from the 20 percent mandatory withholding that normally applies to certain retirement plan distributions.

No Income Tax If Withdrawn Amount Repaid In 5 Years

The CARES Act, you will not owe income tax on the amount borrowed from the 401(k) if you pay it back within five years. In addition, qualified individuals with an outstanding loan from their plan (meaning a loan taken before the CARES Act was enacted) that has a repayment due between March 27 and December 31, 2020, can delay their loan repayments for up to one year. However, interest will continue to accrue on these delayed payments.

Be On The Alert For Scams

As always, scam artists are going to be looking for easy targets. They will be hoping to convince people to take early withdrawals to invest in “no risk and high return” schemes. Don’t be seduced. Times are tough enough and we don’t know how long we will be dealing with the long-term consequences of this virus. So, best to not try to increase your investment options at this time. Stay safe. You may still have a change to recoup your losses or to at least recover your equilibrium if you don’t borrow from yourself for gain. But, if you are facing real hardships, you have many favorable and legal options to take advantage of.

For full details of the government programs associated with borrowing from your retirement account due to COVID-19 hardships, visit https://www.sec.gov/oiea/investor-alerts-and-bulletins/covid-19-related-early-withdrawals-retirement-accounts-be#:~:text=Depending%20on%20your%20company’s%20policies,funds%20before%20reaching%20age%2059%C2%BD.&text=You%20will%20not%20owe%20income,it%20back%20within%20five%20years.

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