AFTER CORONAVIRUS-RELATED DISTRIBUTIONS – NOW WHAT?
By Ian Berger, JD
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Coronavirus-related distributions (CRDs) are no more. Millions of Americans took advantage of the opportunity to make penalty-free withdrawals from their IRAs and 401(k) plans in 2020. But unless Congress resurrects them, CRDs are no longer available.
Yet the economic damage caused by the pandemic is still very much with us. So, without CRDs, where do you turn for money to pay your bills?
Non-retirement funds. Non-retirement plan savings should always be the first place to look. That way, you can preserve the savings earmarked for retirement as long as possible. Any IRA or company plan savings you withdraw from will mean less funds available at retirement.
IRAs. However, if you are forced to tap into your retirement savings, IRAs should be assessed first. Withdrawing from your IRA is easy and can be done at any time and for any reason. Of course, pre-tax IRAs withdrawals are taxable and, if you are under 59½, may be subject to the 10% early distribution penalty.
Company plan loans. If you have no IRA funds, look next to your 401(k) or other employer plan account. If your plan offers loans, consider that option. Plan loans can be made for any reason, and you can borrow up to 50% of your account balance (up to $50,000). You won’t have to undergo a credit check, and the application process is usually simple and quick. Even better, a plan loan isn’t a taxable distribution.
On the other hand, the funds you borrow against will temporarily miss out on tax-deferred growth. And, if you leave your employer with a loan outstanding, you may be hit with taxes on the unpaid loan amount.
Company plan withdrawals. If your plan doesn’t offer loans or you don’t want to take on more debt, an in-service withdrawal may be the answer. Many plans allow you to withdraw from your account at 59½ for any reason and on account of certain hardships at any age.
Hardship withdrawals are allowed if you can satisfy one of the IRS “safe harbor” criteria. These include: medical expenses; homebuying expenses; educational expenses; burial or funeral expenses; payments necessary to prevent eviction or mortgage foreclosure; and expenses to fix home damage. Also included are expenses incurred on account of a disaster if you live or work in a FEMA-designated disaster area. All 50 states have been designated disaster areas because of COVID-19. So, you should be able to get a hardship withdrawal to pay for virus-related expenses if your plan allows them. However, you can never withdraw more than is necessary to pay your expenses.
Any withdrawal of pre-tax accounts will be taxable and, if you are under 59 ½, may be subject to a 10% penalty.
As with loans, if considering a withdrawal, carefully weigh the need for these funds against the loss of tax-deferred growth in your savings plan account.
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