The coronavirus has spread well beyond being just a health crisis. Fallout from the virus has also forced Americans to grapple with how they are going to pay their mortgages, rent, and put food on the table as unemployment trends hold steady. The U.S. government has responded with an unprecedented economic package totaling trillions of dollars, including relaxed rules that expand the ability of Americans to withdraw money from their retirement accounts without penalty.
But opening access to 401(k) money and other retirement accounts doesn’t necessarily mean Americans should start raiding their accounts. Money taken out now could have long-term consequences on savings accounts that Americans will need to sustain them through retirement.
Therefore, let’s break down some of the stimulus package changes and try to evaluate and measure what could be their short- and long-term impact.
Before starting, there’s one big condition attached to taking advantage of the new rules, and that is the legislation requires that the money be a “coronavirus-related distribution.”1 These new rules appear to be fairly relaxed, however.
For example, people diagnosed with the virus are eligible, along with anyone who “experiences adverse financial consequences” as a result of the pandemic, including an inability to find work or childcare. Retirement plan sponsors are relying on the honor system — in other words, your honesty in telling them that you have been adversely affected.
The Good News
Required minimum distributions or RMDs have been waived for 20202 as a result of the new legislation. If you reached the age of 70½ in 2019, you would have been required to take your first RMD by April 1, 2020. This requirement has now been pushed back by a year. This is good news for retirees because you can give your savings and investments another year to grow, tax free.
You can take as much as $100,000 from retirement accounts this year without paying an early withdrawal penalty.3 Normally, the penalty is 10% of the taxable amount when you take an early distribution from an individual retirement account (IRA), a 401(k), a 403(b), or another qualified retirement plan before reaching age 59½. Clearly, this is good news if you need emergency money to help you ride out a financial earthquake.
Furthermore, you can avoid paying taxes on the withdrawal if you put the money back in your account within three years.
Meanwhile, another provision of the bill makes it easier to borrow from 401(k) accounts, lifting the limit to $100,000 from $50,000. Also, if you have a 401(k) loan repayment due this year, you can delay this obligation for another year.
This all is all seemingly good news if you have no other financial options, but the reason these looser rules could be interpreted as a mixed blessing is that withdrawing or borrowing from your retirement account today means you will have less money for the future.
So, while the temptation may be great to withdraw money without certain penalties, and also more of it than in the past, you might want to consider other options to give you the financial lifeline you need to ride out the crisis.
The most direct response you can take to keep from tapping your retirement is slashing your expenses. Call your creditors about delaying credit card payments. If you still have a mortgage, call your lender about deferring payments. For homeowners, the federal government is instituting a program of mortgage deferment likely to be adopted across the industry, which means borrowers who have lost income or employment due to the novel coronavirus fallout will be able to defer payments on mortgages backed by Fannie Mae, Freddie Mac, HUD/FHA, or USDA by up to a year.
If you rent, speak with your landlord about reducing the rent, suspending the rent, or devising a payment plan that recognizes your current situation. You may have leverage on your side in your discussions, as many cities and states have responded quickly with eviction moratoriums.
The reverse mortgage payments you receive are tax free because they are considered loan proceeds, not considered income. Furthermore, a reverse mortgage does not affect regular Social Security or Medicare benefits. However, if you are on Medicaid or Supplemental Security Income (SSI), any reverse mortgage proceeds that you receive must be used immediately. Funds that you retain count as an asset and could impact eligibility.
To qualify for a reverse mortgage, you must be 62 or older and own, live in, and have sufficient equity in your home. If you still have a mortgage, your reverse mortgage will first pay it off and distribute the remainder of your proceeds to you in a cash plan of your choice. One of those options includes a line of credit for which you’re charged interest only on the portion you use. Whatever portion of the line you don’t use continues to grow, a feature many borrowers compare to having a financial safety net ready to catch them should another financial emergency occur in the future. Although a reverse mortgage will pay off your existing mortgage and will not require monthly mortgage payments, you are always responsible for maintaining and paying property taxes and homeowners insurance on your home.
Although the CARES Act and its subsequent extensions have temporarily eased withdrawal restrictions for millions of Americans with retirement accounts, don’t view this relaxation of the rules as an invitation to plunder these accounts. There are many other ways, including a reverse mortgage, to get access to cash without forcing you to touch your precious savings intended for your retirement. Therefore, talk to your financial advisor and other financial professionals whose guidance you trust about all of your various financial options. It should be time well invested. To find out if a reverse mortgage loan is right for you, click here.
We hope this article has given you some help with things to think about. Of course, every situation is different. This information is intended to be general and educational in nature and should not be construed as financial advice.