Don't Mess With Taxes

As the Senate grapples with its latest COVID-19 economic relief payment proposal, millions of Americans who lost their jobs in the pandemic are trying to figure out how they will pay their bills coming due in August.

Those who had a workplace retirement plan, typically a 401(k), likely are deciding whether they should tap that account.

It's always been possible to take what's known as a hardship distribution from tax-favored retirement plans. Pre-coronavirus tax law also allowed for loans from workplace retirement savings accounts.

But COVID-19 also has added some new considerations to this financial route.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted on March 27 provides more favorable tax treatment for withdrawals from retirement plans and IRAs, as well as allows certain retirement plans to offer expanded loan options.

Here's the scoop from the Internal Revenue Service on these new nest egg options.

Who is eligible for special coronavirus retirement plan options?
The CARES Act established coronavirus related circumstances under which you might qualify for the retirement account aid.

Coronavirus-related retirement account withdrawals or loans can only be made to an individual if any of the following situations apply:

• You are diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019, referred to as COVID-19, by a test approved by the Centers for Disease Control and Prevention. This includes a test authorized under the Federal Food, Drug, and Cosmetics Act. The same positive COVID-19 test result also applies to your spouse or a dependent.
• You experience adverse financial consequences as a result of being quarantined, furloughed or laid off, having work hours reduced, being unable to work due to lack of childcare, having a reduction in pay (or self-employment income) or having a job offer rescinded or start date for a job delayed, due to COVID-19. Again, if those same circumstances apply to your spouse or a member of your household — specifically, someone who shares your primary residence — that also is a qualifier.
• You or, again, your spouse or a member of your household owns or operates a business and must close it or reduce its hours of a business due to COVID-19.

When is the retirement money available?
Individuals eligible for coronavirus-related relief may be able to withdraw up to $100,000 from IRAs or, if their employers allow, from workplace retirement plans before Dec. 31.

Note that while 401(k) plans are the more widely used workplace retirement account, similar plans from which you can get emergency money include 403(b), profit-sharing plans and other IRS-approved workplace retirement plans.

What will a COVID-19 retirement plan withdrawal cost me?
The special coronavirus retirement plan distributions are free from the usual 10 percent penalty assessed those younger than 59½. However, you'll still owe taxes on the money you take from your plan.

The special CARES Act offers some relief as far as that tax bill.

There's no mandatory tax withholding on your distribution.

Also, instead of owing one big tax bill for 2020 on the money you take out of your retirement account under the COVID-19 parameters, you may spread the due taxes over three years. This means, for example, that taxes on qualifying $6,000 distribution is taxed for three filing years in $2,000 increments for tax year 2020, 2021 and 2022 return filings.

A quick note for your retirement repayment planning purposes. Those tax year returns will be submitted to the IRS the following year, so you'll need to have the money on hand by April 15 of 2021, 2022 and 2023.

And if you choose instead to pay back your IRA or workplace plan withdrawal amount, you also have three years to do that.

Can I take out a loan instead of a distribution?
If you prefer to borrow from your tax-deferred workplace retirement account rather than just take out the money and pay taxes on it, that could be a good move.

Such loans are not new, but the amount has been increased under the CARES Act. The coronavirus relief bill allows for you to borrow as much as $100,000 (up from $50,000) from a workplace retirement plan. If you don’t have that much in your 401(k), you can take a loan up to your full vested plan amount. S This loan option is available until Sept. 22.

Remember, though, that you cannot take a loan from an IRA. This option applies only to workplace plans.

Another workplace retirement plan loan provision in the CARES Act allows administrators to suspend, for up to one year, loan repayments due on or after March 27, 2020, and before Jan. 1, 2021. A suspended loan still is subject to interest during the suspension period. The term of the loan also may be extended to account for the suspension period.

Finally, note that it's up to your company as to whether you can take out a retirement plan loan.

Businesses can allow the loans, but they are not required to offer them. Similarly, the suspension of loan repayments also is an option, not a requirement. So talk with your benefits office before making any 401(k) et al loan decision.

Where can I find more retirement withdrawal information?
If you want to read the official IRS word on the COVID-19 retirement plan options, it's in IRS Notice 2020-50.

You also can check out the IRS' online FAQs for additional information about this tax and financial assistance option.

Should I do this?
This isn't a question that the IRS attempts to answer. It's one that you need to make on your own, after talking with your family and, if you have them, tax and financial advisers.

Old conventional wisdom is don't mess with your retirement savings. You'll regret it in your later years.

We are not, however, in old conventional wisdom times. Things, medically and financially, are totally out of whack. And if you're looking at being evicted or your family missing meals or sitting around with flashlights because the electric company turned off your service, then the state of your distant retirement is not a big concern.

Still, know that it will cost you, either in lost earnings or taxes you'll owe if you must tap in some form your retirement money early.

If you're in or near dire straits, try talking with your landlord or mortgage lenders about options. Call your credit card company about other payment options of expanded credit. Check with your local social services, food bank and religious groups about assistance programs.

On the federal level, the Department of Labor's Benefits.gov has more on unemployment assistance, healthcare and food and nutrition programs, as well as a benefits finder online search tool.

If you need and qualify for any type of assistance, take it. We all have or probably will need help at some point. Here's hoping you don't need for long.

More importantly, here's also hoping you and your family remain healthy and safe.

You also might find these items of interest:

• 7 common 401(k) FAQs 
• Emergency savings accounts: the next hot workplace benefit? 
• 5 things to know about workplace retirement plan hardship withdrawals

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