Houston – With so many people unemployed, many are considering pulling money out of retirement plans to pay bills. Most financial advisors will tell you this is never a good idea, but if you absolutely need the money to keep a roof over your head, you need to take the money out by the end of this year.
Why 2020 is the best year to borrow from retirement plans
The federal CARES Act includes provisions that make it easier and less punitive for people who have been impacted by COVID-19 to take money out of their IRAs, 401ks and other qualified plans. You do need to be able to prove that your income was impacted in some way: Either you couldn’t work because you were laid off or furloughed or you had no child care for your minor children so that you could work.
Normally, if you pull money out of your 401k or IRA before you’re 59 and a half years old, you are hit with a 10% penalty and you have to pay taxes on the money you withdraw. That is a big hit to money that may have taken you years or decades to save.
Until the end of 2020, you can withdraw up to $100,000 from a qualified retirement account with no 10% penalty. The IRS will give you three years to pay the taxes on the money your withdrew, or you can pay it back to your account within three years and owe nothing in taxes.
“The government is giving you the ability to not put you in the financial death spiral by punching you with taxes and penalties,” explained financial planner Richard Rosso with RIA Advisors.
Proceed with Caution
Don’t think of this as a free pass to use your retirement money if your income has not been impacted by COVID-19. The IRS may require proof of your loss of income in the future. If you can’t provide that, you will likely have to pay the taxes and penalty on the money you took out.