These are extraordinary times. Families are encountering unforeseen and extreme pressures because of the COVID-19 (or coronavirus) pandemic. The pain and fear in communities across the United States is real and justified. Americans have lost family members, friends, and coworkers to a silent killer. Many of us were ordered by state and local officials to stay home and most businesses in many states were required to close. Tens of millions of jobs have seemingly disappeared. We are still living through a frightening period in our history, and it is not entirely clear how long it will last or what we will find on the other side.
So, retirement and your retirement savings may not be top of mind for most Americans. Urgent issues and needs understandably come first. On March 27, 2020, Congress’ $2 trillion response to the economic consequences of the COVID-19 pandemic became law. It was a beginning effort to respond to those urgent needs. This unprecedented legislation also includes several provisions relating to retirement savings that unsurprisingly got little attention given the tidal wave of money Congress appropriated for expanded and extended unemployment insurance, stimulus checks for tens of millions of Americans, and desperately needed loans to businesses large and small. Nonetheless, these provisions could be important to you and your family, both now and in the future. This post will describe these provisions and offer suggestions about how you might put them to their best use in these challenging times.
CARES Act Retirement Provisions
The principal theme of the retirement provisions of the CARES Act is that Congress intended ready access to retirement savings to help people navigate the pandemic-related economic shutdowns ordered in most states and the resulting economic hardship for many families. Unemployment is approaching its highest levels since the Great Depression and gross domestic product --- the measure of goods and services transacted in our economy --- has fallen significantly and likely will not improve for months. Here are a few measures Congress enacted that may potentially help you manage the fallout for your finances:
Withdrawals. The CARES Act’s new rules allow you to withdraw money from your accounts in eligible retirement plans if:
- you, your spouse, or a dependent has been diagnosed with COVID-19;
- you have experienced adverse financial consequences because you have been quarantined, furloughed, laid off, or have had work hours reduced due to COVID-19;
- you are unable to work because of a lack of child care due to COVID-19;
- you own or operate a business and have had to close or reduce hours due to the COVID-19; or
- you have experienced an adverse financial consequence due to other factors the Internal Revenue Service will define.
An eligible retirement plan includes individual retirement accounts and annuities (IRAs); qualified pension, profit-sharing, or stock bonus plans (including 401(k) plans); qualified 403(a) and 403(b) plans; and governmental section 457 deferred compensation plans.
During 2020 only (retroactive to January 1, 2020), you may withdraw up to $100,000 without paying the 10% early withdrawal tax penalty that usually applies to withdrawals by retirement savers under the age of 59½ for individual accounts and the ordinary retirement age for participants in employer plans. You will be subject to federal income taxes on these withdrawals, but you can pay them over three years rather than paying all in 2020. You will be permitted to re-contribute (i.e., return) the withdrawn funds to your retirement plan in one or more payments, again over three years. These re-contributions will not count toward the cap on contributions to a retirement plan in the year you make them. For example, re-contributions would not count toward the $19,500 that 401(k) owners may contribute before taxes in 2020.
Loans. The new law authorizes your retirement plan’s sponsor to allow you to take loans from the plan of up to $100,000 or 100% of your vested funds in the plan within six months of enactment of the CARES Act (September 23, 2020). Plans are not required to increase their limits from $50,000 to $100,000, but they can. If you had an outstanding loan on March 27, 2020, any repayment of the loan due between March 27 and December 31, 2020 may be delayed for one year.
Required Minimum Distributions. Tax law typically requires you to withdraw a percentage of your retirement savings --- “required minimum distributions” or RMDs --- when you reach age 72 (or 70½ before 2020) so that those savings can be taxed. The good news is that all RMDs for 2020 have been waived for the owners of IRAs and participants in 401(k), 403(b), or other defined contribution plans.
Should You Take Advantage of the CARES Act’s New Rules?
In ordinary times, the best advice is to avoid withdrawing money from your retirement plan before you have retired except in the most dire circumstances. Tax law specifies conditions for “hardship withdrawals” that are not subject to a 10% withdrawal penalty that applies depending upon the plan owner’s age. Before the pandemic, these conditions essentially were the list of dire circumstances in which the government suggests withdrawals might be appropriate. One way to think about the CARES Act’s retirement savings withdrawal provision is that it expands the list of conditions for hardship withdrawals and loosens the rules governing them.
But just because you can make a withdrawal does not mean you should. The now-waived tax penalty is not your only risk. There is also the serious risk that you won’t pay back the withdrawal during the three years provided by the CARES Act, or at all. The result would be reduced retirement savings and reduced retirement income, potentially for the rest of your life. During this difficult period, avoid making a short-term decision that causes a long-term problem, even if the short-term problem is urgent.
Instead, look for alternative ways of securing the money you need beginning with potential sources of government emergency funding. If you were laid off or lost your job, file for unemployment benefits. The CARES Act extended benefits by 13 weeks (to 39 weeks in most states) and increased benefits by $600 per week. Independent contractors, self-employed individuals, and others who are ordinarily not eligible for unemployment benefits are newly covered under the Pandemic Unemployment Assistance program; so, apply even if you are not sure you are eligible. State unemployment offices are swamped with claims. Be patient.
If you own a small business or sole proprietorship, or if you are self-employed or an independent contractor, then the CARES Act may make you eligible for the Small Business Administration’s Paycheck Protection Program and other loan programs. PPP loans, which you can obtain from your usual bank or local lender, are forgivable if you spend the money only on mortgage or rent, utilities, and payroll (i.e., keep paying your employees). Funds for this program ran out very quickly, but both parties in Congress support appropriating more money for small business loans. Your state or city also may sponsor emergency loan or grant programs. Research them on those governments’ websites.
If you have an urgent need for money right now, and government resources are not available or inadequate, consider private-sector alternatives. Remember, you can’t borrow to fund your retirement, but you can borrow to replace or supplement income while you are still in your prime working years. Piling on debt is ordinarily not advisable, but if you think you are more likely to pay back a loan than to re-contribute money to your retirement plan, then it’s worth shopping around. Interest rates are currently quite low, so you may be able to get a low-cost personal or home-equity loan. You might even take a loan --- instead of a withdrawal --- from your retirement plan. However, and this is important, compare interest rates and repayment terms. In this climate, you may be better off with a loan from your bank or another established commercial lender. No matter the source, you should borrow only the amount you need right now to support yourself and your family. This is not the time for families or individuals to make big financial moves.
The retirement provision in the CARES Act that is an unalloyed good thing for older Americans is the RMD waiver provision. Basically, you don’t have to withdraw funds from your retirement plan account in 2020 even if the law would have required it in other years. So, if you don’t need the money, don’t withdraw anything, or withdraw as little as you can. Protect the money by keeping it in a tax-protected retirement account. It will preserve your savings for a while longer, and give your investments a chance to recover from the extreme market volatility that has resulted from the coronavirus pandemic and its economic consequences.
Again, these are extraordinary times. But the extraordinariness, and the real fears and uncertainties we are facing, require us to pause before we make any decisions that have lasting consequences. Congress has given you a few ways to soften the effects of the pandemic-driven economic downturn. Please take care to ensure that you don’t regret today’s “solutions” when the time comes for you to retire.