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If you're under 59 1/2, a 401(k) withdrawal is normally a costly proposition. If you’ve lost your job but you’re still in your old employer’s 401(k) … I’m 47 years old, made about $72,000/yr, and had $150,000 in my 401k. Should You Use This Coronavirus Retirement Loophole Before 2021? The COVID-19 relief bill waives the standard 10% penalty for early retirement plan withdrawals and doubles the maximum allowable loan amount. Over the last several weeks, millions of Americans have had to do what they never thought they would have to do. Sign up here. A link has been posted to your Facebook feed. Qualified individuals affected by COVID-19 may be able to withdraw up to $100,000 from their eligible retirement plans, including IRAs, between January 1 and December 30, 2020. Not only must you deal with immediate challenges during this time, like the one you’re experiencing now, but you must also stay focused on three other vital factors: Long-term investing, cutting expenses and tax-planning. Dear Pete: I withdrew $75,000 from my 401(k) a couple of weeks ago because I was laid off. If you started your career at around age 22, you’ve been in the workforce for roughly 25 years, and you’re likely to remain in the workforce for another 20-23 years. 2020 is a year that most of us will never forget. That’s why you made the bold decision to withdraw $75,000 from your 401(k). A link has been sent to your friend's email address. Workers can withdraw or borrow up to $100,000 from 401(k)s under new COVID-19 aid package. Anyone can take up to $100,000 from their account — through a loan […] My wife worked part-time as a server at a high-end restaurant, but obviously that’s currently closed. If you’re facing economic hardship tied to the coronavirus, you can tap your traditional retirement account, withdrawing up to $100,000 without the typical 10% penalty that typically applies to withdrawals before the age of 59 ½ (outside of certain exemptions). Do an IRA Rollover if Necessary. It will just go differently than you thought it would. It took my entire adult life to save that much, how in the world will I ever be able to retire? I’m 47 years old, made about $72,000/yr, and had $150,000 in my 401k. Coronavirus aid law lets you more easily tap retirement savings. But obviously, it didn't come soon enough for some of the bill collectors figuratively beating down your door. Coronavirus has created instability, but it’s important not to panic and don't lose your cool about your 401(k) either. The CARES Act allows folks in need of money to withdraw from their 401ks with fewer penalties, but that doesn’t mean it’s a free-for-all, or that making 401k withdrawals is right for everyone. Which is exactly what will happen if you’re not careful. The IRS released guidance on Friday which details new rules for individuals affected by Covid-19 to take a withdrawal from a 401 (k) plan or an individual retirement account. Unfortunately, our website is currently unavailable in your area. I’m married and have two teens. Have a question for Pete the Planner? Your financial life isn’t over, but the decisions you make in the next couple of years will certainly determine whether you have the sort of retirement you’ve always dreamed of. Peter Dunn is an author, speaker and radio host. A4. We couldn’t wait any longer, so I took out the $75,000. Read or Share this story: https://www.usatoday.com/story/money/2020/05/03/coronavirus-draining-401-k-wont-end-your-financial-life/3048762001/, Get money advice like this delivered right to your inbox. Download The CBS News App The CARES Act allows no-penalty withdrawals, but experts advise against it, Breaking into savings: How to break into your retirement piggy bank in the coronavirus crisis. But the decisions you make in the next couple of years will certainly determine whether you will have the sort of retirement you’ve always wanted. The CARES Act allows no-penalty withdrawals, but experts advise against it, How to break into your retirement piggy bank in the coronavirus crisis, Your California Privacy Rights/Privacy Policy. Your spouse or … The Cares Act lets people of any age take up to $100,000 from their IRA or 401 (k) by Dec. 30 without a penalty. Either way, she should still be covered by the federal benefit of $600/week. The coronavirus stimulus package waives 401k early withdrawal penalties, making it easier for Americans to access trillions of dollars in retirement accounts to stimulate the economy. In order to comply with the internationally applicable GDPR - and other regulations, no IP address or user account originating in your geographic location will be accepted. Requested URL: www.thepennyhoarder.com/retirement/using-401k-for-coronavirus/, User-Agent: Mozilla/5.0 (Windows NT 6.3; Win64; x64) AppleWebKit/537.36 (KHTML, like Gecko) Chrome/83.0.4103.116 Safari/537.36. That's because you'll owe a 10% penalty on withdrawn funds. Here's everything you need to know. A coronavirus-related distribution is a distribution that is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020, up to an aggregate limit of $100,000 from all plans and IRAs. The good news is, unemployment benefits are retroactive, which means you’ll receive benefits back-dated to the moment you filed. Ideally, if you’re able to find work again in the next few weeks, you can put the remaining money back into an IRA to lessen your tax burden. The next couple of years will certainly go differently than you assumed they would, but frankly, everyone is facing that same reality. Answer: I’m very sorry this is happening to you, Barry. The $900 billion stimulus bill that Congress passed Monday allows workers to take money from their 401(k)s without being hit with a tax penalty — a provision carried over from the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed last March. As hard as it is to do, you have to keep one eye on the distant future while still triaging the day-to-day financial challenges which pop-up along the way. Once some of the shock and trauma of the moment wears off, I think you’ll see your financial life is not permanently ruined. All this is to say, help is on the way. We were already behind on some bills, and then our paychecks went away. Buzz60. The shock of finding yourself with no income is traumatizing, and the longer it drags on, the more catastrophic it feels. Other large workplace 401(k) providers witnessed similar behavior. Sign up here, Should I withdraw money from my 401(k)? If you have any questions or requests, please contact us at 727-317-5800. Withdrawing from an IRA: Should I withdraw money from my 401(k)? Did I just watch my financial life end? It’s up to you to make the proper decisions over the next 20 years to ensure long-term success. These coronavirus-related distributions aren't subject to the 10% additional tax that generally applies to distributions made before reaching age 59 and a half, but they are still subject to regular tax. ... One of those benefits is the ability to withdraw money from your 401(k), 403(b), or IRA without facing penalties. The keystone to the entire plan, whether you’re receiving unemployment benefits or you’re back working again, is to make sustainable spending cuts which can then be used to cut debt and more substantially fund your retirement plan. COVID-19 Related Tax Savings on Early Withdrawals from your IRA, 401K or 403B. The last thing you need is to get back on your feet, only to get knocked back down with a substantial tax bill in the coming years. Coronavirus hardship withdrawals allow qualified people to withdraw as much as $100,000 of their balances from 401 (k)s and IRAs, but these withdrawals aren’t available to everyone. This website is using a security service to protect itself from online attacks. The CARES Act changed all of the rules about 401(k) withdrawals. You absolutely did not just watch your financial life end, but you’re not alone in feeling that way. Experts typically advise against withdrawing money from your 401(k), but the fallout from the coronavirus crisis has left many people scrambling to pay their bills. That’s my biggest concern for you. The new rules to take a withdrawal from your retirement will apply to you, if: You have been diagnosed with SARS-CoV-2 (also called COVID-19) by a CDC approved test. The maximum unemployment benefit in Texas is $521 per week and you will also receive the $600/week enhancement made possible through the CARES Act. by Charles Eisenhart, CPA on January 22, 2021. He has a free podcast: "Million Dollar Plan." The Coronavirus Aid, Relief, and Economic Security Act makes it easier to avoid penalties and spread out the taxes associated with withdrawals from retirement savings if you qualify. COVID-19 Related Tax Savings on Early Withdrawals from your IRA, 401K or 403B. Besides the many medical issues created by the pandemic, it also created economic hardships for many Americans. This is particularly important if you’re considering 401k withdrawals during coronavirus. Before COVID, early withdrawals from your retirement accounts came with stiff penalties. Email him at AskPete@petetheplanner.com. Do I have to pay the 10% additional tax on a coronavirus-related distribution from my retirement plan or IRA? There’s no doubt, unemployment benefits are taking longer to get in the hands of people than we all want. Who is eligible for a coronavirus hardship 401(k) or IRA withdrawal? Let friends in your social network know what you are reading about. Save better, spend better: Get money advice like this delivered right to your inbox. Your spouse or a dependent has been diagnosed with SARS-CoV-2 by a CDC approved test. I withdrew $75,000 from my 401(k) a couple of weeks ago because I was laid off. Yes, going backward, $75,000 on your quest for retirement isn’t ideal, but coming up with $15,000 in tax money within the next three years is what will truly hurt. Fortunately, all three of these factors are related to each other and are complementary to each other in the form of employer-sponsored retirement plans and/or IRAs. While the CARES Act allows you to withdrawal up to $100,000 penalty free from your 401(k), you are still responsible for paying taxes on the money over the next three years. © 2021 USA TODAY, a division of Gannett Satellite Information Network, LLC. Retirement planners say only do this if necessary. Your wife may be eligible for state unemployment, too, if she met the earnings threshold for the state of Texas. 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