COVID-19 and Your Retirement Plan

by Ande Frazier

Financial Frequency. myRetirement

April 24, 2020 . 3 min read

COVID-19 and this pandemic is affecting everyone, no matter what stage of life you’re in. One thing it’s really thrown through a loop is retirement because of the economic effects it has had. Retirement may seem so far away and unreachable for some at this point, but for those looking at what to do with their retirement plan during this crisis, we have some tips.

Treat your retirement plan like your face and don’t touch it.

The stock market might be volatile over the next few months, so if you are one of those people who track your account balances like your calories, then perhaps it is time to take a break from that for a while.  If you are not within three years of retiring or not already in the thick of it, stay the course and don’t make any crazy changes.  

This might be a good time, however, to reevaluate your goals.  Making sure your goals are still aligning with your values is important, but if you are feeling financially strapped right now, you may have to adjust your goals, especially those short term ones.  You should also look at the actions you are currently taking to reach your goals.  If possible, stay on track, but if those actions seem impossible right now, what can you change temporarily to adjust?  

You feel like you’ve run out of options.

If you need money, your retirement plan should be a last resort.  But if there is no other option, here is what you need to know.  There are two ways you can access your retirement money, through a distribution or a loan.  

For distributions, if you are in an eligible retirement plan (examples are: IRAs, 401(k) plans, qualified pension plans, 403(b) annuity plans and gov’t section 457 deferred compensation plans), you may be able to take money if needed due to COVID-19, providing it is based on the following parameters:

  • You or your spouse has been diagnosed with COVID-19.
  • You have been furloughed, laid off, or have had your hours reduced due to COVID-19 and experienced adverse financial consequences.  
  • You have no access to childcare and are unable to work due to COVID-19.
  • You are a business owner and have had to shut down or cut hours due to COVID-19.
  • You have other adverse financial consequences due to COVID-19 that are outlined by the IRS.  

There are some limits.

If you meet these parameters, you can withdraw up to a total of $100,000 in 2020 from eligible retirement plans.  In addition, the usual 10% penalty that applies for early distributions (prior to age 59 ½) has been waived thanks to the CARES Act.  This applies to any distributions between January 1, 2020 and December 21, 2020.   

Taxes still apply.

You will have to pay Uncle Sam (tax) on these distributions at ordinary income tax rates, but you will have three years to pay ratably any taxes owed beginning with the taxable year of 2020.  

By the way, if you are taking required minimum distributions from your retirement accounts, you can waive taking those distributions for 2020.  This applies only to defined contribution plans such as an IRA, 401(k) plan or 403(b) plan.  

What are your other options? 

Now, perhaps you don’t want to take a distribution, but you are interested in borrowing money from your retirement plan. What then?  Well, you can take loans from eligible retirement plans within 6 months of when the CARES Act was enacted.  

And here is some good news, limits on these loans have doubled from the normal $50,000 cap to $100,000.  However, they are capped at 100% of the vested account balance.  But here is the thing, not all plans are required to increase these limits.  They do, however, have the flexibility to do so, which is a plus. Check with your individual plan provider to evaluate your options.   

What does repayment look like?

As far as repaying these loans, if you are a qualifying individual and you have an outstanding loan dated on or after March 27, 2020, you can delay the repayment of the loan due between March 27, 2020, and December 31, 2020, for one year.  Keep in mind though that any subsequent repayments and interest will be adjusted to reflect such a delay in repayment.  And when you do repay those loans, it will be with after-tax dollars, even if done through payroll deduction.

Make sure you know the risks.

If you lose your job or change employers while you have an outstanding loan, your entire retirement plan loan balance is due within 60 days. If you can't repay it, the IRS then your state will treat the funds as a withdrawal, which means taxes will be due on that money.  If you spent all the money you borrowed, you might not have the funds to pay those taxes, which can get you further into debt.  With so many facing unemployment, it is important that you are aware of this condition so that you can plan appropriately.

Bottom line, taking a loan or distribution should typically be a last resort if you need money.  For more information about how retirement plans are affected during the COVID-19 crisis, check out www.IRS.go.