Which is exactly what will happen if you’re not careful. Peter Dunn is an author, speaker and radio host. Your spouse or … 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. Sign up here. All this is to say, help is on the way. 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. The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY. 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 shock of finding yourself with no income is traumatizing, and the longer it drags on, the more catastrophic it feels. Besides the many medical issues created by the pandemic, it also created economic hardships for many Americans. This website is using a security service to protect itself from online attacks. 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). We were already behind on some bills, and then our paychecks went away. 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. The COVID-19 relief bill waives the standard 10% penalty for early retirement plan withdrawals and doubles the maximum allowable loan amount. But obviously, it didn't come soon enough for some of the bill collectors figuratively beating down your door. Here's everything you need to know. 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. Over the last several weeks, millions of Americans have had to do what they never thought they would have to do. 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. 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. Workers can withdraw or borrow up to $100,000 from 401(k)s under new COVID-19 aid package. 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. These three factors are always important, but when emergencies happen, they instantly seem unimportant. I haven’t received unemployment yet, nor has my wife. 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. 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. I’m 47 years old, made about $72,000/yr, and had $150,000 in my 401k. 2020 is a year that most of us will never forget. Before COVID, early withdrawals from your retirement accounts came with stiff penalties. I’m married and have two teens. Did I just watch my financial life end? Your wife may be eligible for state unemployment, too, if she met the earnings threshold for the state of Texas. 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. Withdrawing from an IRA: Should I withdraw money from my 401(k)? COVID-19 Related Tax Savings on Early Withdrawals from your IRA, 401K or 403B. Other large workplace 401(k) providers witnessed similar behavior. This is particularly important if you’re considering 401k withdrawals during coronavirus. The next couple of years will certainly go differently than you assumed they would, but frankly, everyone is facing that same reality. There’s no doubt, unemployment benefits are taking longer to get in the hands of people than we all want. Do I have to pay the 10% additional tax on a coronavirus-related distribution from my retirement plan or IRA? Download The CBS News App Buzz60. Coronavirus aid law lets you more easily tap retirement savings. Either way, she should still be covered by the federal benefit of $600/week. Have a question for Pete the Planner? 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. That's because you'll owe a 10% penalty on withdrawn funds. 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. It’s up to you to make the proper decisions over the next 20 years to ensure long-term success. 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. If you're under 59 1/2, a 401(k) withdrawal is normally a costly proposition. Unfortunately, our website is currently unavailable in your area. A4. Coronavirus has created instability, but it’s important not to panic and don't lose your cool about your 401(k) either. Q5. We couldn’t wait any longer, so I took out the $75,000. Dear Pete: I withdrew $75,000 from my 401(k) a couple of weeks ago because I was laid off. He has a free podcast: "Million Dollar Plan." COVID-19 Related Tax Savings on Early Withdrawals from your IRA, 401K or 403B. I withdrew $75,000 from my 401(k) a couple of weeks ago because I was laid off. The good news is, unemployment benefits are retroactive, which means you’ll receive benefits back-dated to the moment you filed. © 2021 USA TODAY, a division of Gannett Satellite Information Network, LLC. Answer: I’m very sorry this is happening to you, Barry. You absolutely did not just watch your financial life end, but you’re not alone in feeling that way. Save better, spend better: Get money advice like this delivered right to your inbox. by Charles Eisenhart, CPA on January 22, 2021. 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. 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. That’s why you made the bold decision to withdraw $75,000 from your 401(k). 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 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. Let friends in your social network know what you are reading about. 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