Point of Interest
If you’re facing a financial crisis during the coronavirus pandemic, the CARES Act makes it easy to borrow from your retirement savings. But that doesn’t mean it’s a better option than a personal loan, a 0% APR credit card or an emergency fund in a high-yield savings account.
In the midst of a global pandemic, your social media feeds have likely been swarmed with bad news. However, there have been some glimmers of hopes during this period of uncertainty.
For instance, the CARES Act is making it easier for Americans to tap into retirement accounts during the pandemic, but experts say there’s plenty of things to consider with the new provisions.
“This is something that cannot be taken lightly,” Larry Sprung, president and lead wealth manager at Mitlin Financial said.
If you’re wondering whether you should tap into your retirement savings, the answer depends on your personal financial situation. Sprung said it’s important to get advice that will assist you now while having the least impact on your current and future financial situation. Other options, like a 0% intro APR credit card or an emergency fund in a high-yield savings account, could be better solutions depending on your circumstances.
How the CARES Act affects retirement savings
With the intention to help those hurt by the pandemic, the CARES Act is temporarily allowing those impacted to tap into their retirement funds — up to $100,000 of their savings — without the typical 10% penalty.
The new law covers a wide range of people, including those who lost their jobs due to the outbreak to anyone who has COVID-19.
On the bright side, Robert Martorana, portfolio manager of Right Blend Investing, said people who qualify can get access to their retirement funds to help them pay their bills and avoid hurting their credit score. However, the downside of the new law is that any loans must be paid back, usually in three years, he said.
“Another downside for any distribution is that you may not want to sell at the bottom of the market just because you need cash,” Martorana said. “Every client is different, and the details are worth discussing with your advisor or the sponsor of your retirement plan.”
The new law also doubles the maximum loan amount from $50,000 to $100,000 and the percentage allowed from 50% to 100% of a 401(k) balance for the next six months.
Sprung said this provision can be a better option than taking funds from an individual retirement account, but that it’s important to understand how this will affect you in both the short and long term.
“This will allow you to remove the funds and pay yourself back over time through the loan while being able to defer payments for up to one year,” Sprung said. “This is another instance where having a conversation with your advisor and a certified public accountant is crucial before moving forward.”
Lastly, the new legislation suspends required minimum distributions (RMDs) for 2020.
Martorana said suspending RMDs means that people will not be forced to sell after a sharp decline in stocks, high yield bonds, and other investments.
“You don’t want to be forced to sell after the market drops,” Martorana said. As for the disadvantages, a client may want to consider the tax implications of a delay, and that will vary by client.”
Should I dip into my retirement savings during the pandemic?
While pulling money from your retirement account is possible, Sprung said it should be the last resort. For situations like the global pandemic, he recommends having an emergency fund or setting one up immediately if you don’t have one.
By withdrawing money from your retirement account early, you risk stunting its growth and you’ll still owe taxes on your retirement distributions — unless it’s a Roth account. The CARES Act gives people up to three years to pay taxes on 401(k) or IRA withdrawals. If you opt for a 401(k) loan, then you’ll have five years to pay back what you owe with interest.
“It is so important to have an emergency fund and I think more people than ever may see the benefits after this event,” Sprung said.” Everyone is different. Depending on their personal financial situation, there are different ways to attack financial obligations after having a depleted emergency fund.”
Sprung said while invading an IRA or 401(k) should be a last option, it may end up being the best option. Similarly, Martorana said it’s worth disrupting the accumulation of your retirement savings if that’s the only option left.
“The good news is there are favorable policies in place that will allow them to utilize these funds and replace them over time with potentially no impact,” Sprung said.
Alternative emergency cash options
Although the new legislation temporarily creates favorable policies to tap into retirement funds, it’s critical to consider all your options.
There are other ways to pull emergency cash during this time through personal loans, credit cards, tapping into home equity or withdrawing the cash value of any life insurance policies.
Several utility companies, credit card issuers and banks are providing temporary relief during this time. Make sure to exhaust all your options before dipping into your retirement and reach out to your bank, insurance providers and utility companies to better understand your financial obligations during the pandemic.
“We are all trying to make the best of a bad situation, and it doesn’t help to be burdened by guilt that you need to dip into your 401(k),” Martorana said. “You don’t have to make a big decision right now: Work with your retirement plan to take some small steps, and don’t beat yourself up.”
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