Coronavirus has had a dramatic impact on all aspects of our personal and financial lives over the last few months, including our retirement plans. A widespread drop in income as a result of the shutdown has forced many to use their retirement funds to pay for bills, mortgages, groceries, and other everyday expenses.
In response to the sudden downturn, Congress took steps in late March to help make it easier for anyone under 59½ who has experienced financial hardship from coronavirus – quarantine, layoffs, reduced hours, or furlough – to take a “coronavirus-related distribution” from their qualified retirement plans including IRAs and 401(k)s without penalty.
Previously, to access those funds before age 59½, you would have to pay a 10 percent penalty on any amount you take. Now, under the $2 trillion relief package, you can take a withdrawal of up to $100,000 from your retirement savings until the end of 2020, without incurring early withdrawal penalties.
You also can’t forget about taxes. While the new legislation allows for penalty-free withdrawals, there will still be income taxes owed on withdrawals from traditional 401(k) deferrals.
Under the new stimulus package, consumers are allowed to spread out those income taxes over a three-year period, so while you won’t necessarily need to take a huge hit in 2021, it’s worth recognizing that any deductions from your retirement account are still taxable.
Feeling the squeeze
The new legislation has brought much needed assistance to many people caught in the financial fallout of the pandemic. However, there are concerns that the volume and value of money being taken out of retirement accounts could increase over the next few months, along with other worries that distributions will not be returned to accounts.
Financial experts often advise against dipping into your retirement accounts early for valid reasons. Even if there's no penalty charge, an early withdrawal diminishes your future earning potential, reduces your final balance, and could have long-term implications.
Always get advice
Whether you’re nearing or leading up to retirement, it can be hard to think about the future during these challenging times.
It’s key to consider all options. Retirement savings are a long-term investment. There are drawbacks to any kind of early withdrawal. Reducing the funds you have growing in a retirement account could jeopardize your financial security when you’re older and offset your plan entirely.
Be sure to talk to your tax advisor for guidance and support to help you make the right decision before cashing out your retirement savings early.
Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.
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