57- Access Your Retirement Funds Penalty Free


Episode Overview:

With the Pandemic ongoing, the US Government has taken several measures to mitigate the financial crisis. One such provision in the recently passed CARES Act allows penalty free access to your retirement fund. Ken wades through this legislation for you, sharing what you need to know. He shares his knowledge in an easy-to-track Q&A format. Who qualifies and what accounts can you draw from? Ken answers this and more as we work to weather this storm together.

Transcriptions are auto-generated, please excuse grammar/spelling!

Happy day to you. This is Ken Kaufman, and I am thrilled you’re here for Episode 57 – Access Your Retirement Funds Penalty-Free. Now, I’ve been anxious to get to this episode. There’s been information out about this now for about a month, and I think it’s really important to get this information into your hands and into your knowledge base as you’re working on your financial planning.

Now the IRS in conjunction with all of the other entities that were involved in creating the CARES Act which was passed at the end of March put in some provisions of that about being able to get access to retirement funds if you are being impacted by this COVID-19 pandemic. I want to jump into some question and answer type of a flow to this, and some of this comes from the senate finance committee and some other places relative to those who are in charge of trying to explain how the program works.

So the first question here is: I really need to withdraw money from my retirement account because I’ve been impacted by the COVID-19 pandemic. Am I eligible or can I do that? What’s happened is this act, the CARES Act, has created a new type of distribution called the coronavirus-related distribution or CRD is the acronym that it’s being given. It basically says that if you, your spouse, or a dependent have been diagnosed with COVID-19, then you’re eligible to be able to pull money out of your retirement plan. There’s going to be some more details on that but let me go through a couple of other pieces. You don’t just have to be diagnosed. Also, if you’ve experienced any type of adverse financial consequences as a result of this, so you’ve lost your job, or your spouse has lost their job, or you’ve been furloughed—anyways we can go down the list—any type of economic hit whatsoever. Also, if you’re unable to work because you have childcare as a result of coronavirus or a lack of childcare I should say, or if you own and operate a business that you’ve had to either close or reduce the hours to that business, then you’d be eligible. Really just any other type of financial consequences, which I think that can apply to a lot of us most likely. If you’ve had any type of negative financial impact, this is an option that you could potentially consider.

I want to take my money out of my retirement account because I’m afraid that the stock market is going to crash. Can I do that? Technically no. And I agree. The market’s been highly volatile. Since the beginning of the year, it’s been down I think as much as 30%. I checked today which this episode will launch a few days after or this episode will go live a few days after this recording, but I think we’re still down around the 13% to 15% range from where we started at the beginning of the year. Now, even if the market’s going down or you’re afraid or that’s your only reason to take a distribution or pull money out of retirement, it’s not going to qualify as a coronavirus-related distribution or a CRD.

Now, is there a cap to how much you can withdraw under the CRD? The answer is yes. During 2000, you can take up to $100,000 out of a retirement plan in order to fall under this CRD requirement.

And then what types of retirement accounts are covered? You know, I’ve got some money in a 401(k), a Roth IRA, a 403(b), and so on and so forth. Here’s everything that’s covered. These special withdraw rules apply to the following—retirement accounts and annuities, qualified pension, profit-sharing, stock bonus plan including 401(k) plans, qualified 403(a) annuity plans, 403(b) annuity contracts, and custodial accounts and governmental section 457, deferred-comp plans. That covers pretty much all the options.

Now, here’s the question: do I have to pay the 10% penalty withdrawal if I’m taking the CRD? This is where the act comes in, and this is awesome. No. The 10% penalty is completely waived and does not apply. By the way, if you’re under age 59 and a half, there’s a 10% penalty that you have to pay for taking money out of a qualified retirement account. The CRD is completely waiving that 10%. If you have $10,000 in a retirement account that you need to take out to help support your family because you’ve lost your job or had some other negative financial impact because of COVID-19, that would save you $1,000, meaning you would have only gotten $9,000 but, in this case, you could get all $10,000. So, completely penalty-free.

Now, moving on, when can I receive the coronavirus-related distribution? It’s basically any time in 2020. From here all the way forward, eligible. Also, if you happen to take money out of retirement before all this happened back to January 1st, my understanding is there might be a way to get re-characterized so that you don’t owe the 10% penalty.

Do I have to pay tax on the distributions? The answer is yes, but the IRS has done some things here to try to help out. They’ve said, “We will allow you to spread out your tax liability over 3 years, what’s called, ratably,” or that basically means equally. Let’s suppose I take $10,000 out and I’m in, let’s say, a 20% tax bracket. That would mean that I owe $2,000 of tax. Well, that would mean, if I take the $2,000…or let’s say it’s $3,000 of tax just to make our math really easy. You’re in a 30% bracket. That would mean I need to pay $1,000 in tax in 2020 when I file my return in 2021, and then another $1,000 in tax for 2021, and then the remaining $1,000 in 2022. That really spreads out the tax liability, which is actually a pretty nice benefit.

Can I re-contribute the withdrawn funds back into my retirement account? The answer here is yes. I think in fact that would be encouraged and that is a way to avoid the taxable event happening where you’d owe income tax on the money that you take out. There are some rules and provisions around this to take a look at. You want to talk to your tax advisor to make sure that you handle this correctly and that the taxes are properly handled as well.

Now, are there any changes regarding loans from retirement plans? If you’re an employer who sponsors a retirement plan that has a loan provision, if they will adopt the CARES Act provisions and most likely employers are going to be doing that trying to help out their employees however they can, the amount of potential loan to be withdrawn is doubled. Most plans only allow you to take a loan of up to $50,000. This now pushed it to $100,000. Also, loans generally are only allowed to be taken up to 50% of your loan balance. Whereas, now, you can take up to 100% of your money out as a loan. The difference here is, when the money comes out, it’s not taxable to you. You do have to pay an interest rate and interest rates are low. You pay an interest rate into your account because the amount you take out is amortized out and so you’re paying principal and interest with each payment and spread out for over 5 years. The great thing about it is that interest is going to yourself.

Now, there are some downsides from retirement plan loans. I’ve talked about that before, and maybe I’ll talk about it in the future. I won’t get into that here, but a loan is an option to avoid tax and then you’re paying yourself back and you’re not paying somebody else the interest. The interest is something that’s going into your own account.

Also, some changes around required minimum distributions and this one is a little frustrating to me. The question here is: am I required to take my required minimum distribution or RMD for my retirement account this year? If you’re not 70 and a half or older, this doesn’t apply to you yet. In essence, the IRS requires that you take a certain amount of money out of your retirement account each year because they don’t want that money sitting there not being taxed. They want to force you and this is something that everybody deals with when you hit age 70 and a half. You have to start pulling money out of your retirement account based on a calculation called the required minimum distribution. You can Google that. There’s formulas and things around how to do that.

What this act has said is anyone who’s over 70 and a half does not have to take their RMD or their required minimum distribution in 2020. Now the reason why I’m frustrated with this is because I help my mom with her finances, and I perhaps planned a little bit too much or a little bit too aggressively because we took her retired minimum distribution in January already. In fact, we did it in a way so it would go towards charity and there are some tax advantages to doing that. Maybe I’ll talk about that at some point in the future. But, the point here is that what I guess my frustration is that this rule applies for the entire calendar year of 2020 so I basically took a required minimum distribution for my mom or had her go through that process and it didn’t need to happen this year and could’ve potentially saved some taxes. This is a really good one for those who fit in the category. If you’ve got enough funds already and you don’t need to take money out, you can just keep deferring it in your retirement plan. Now, there’s more information about this. You can go and Google CARES Act retirement distributions or coronavirus-related distribution or CRD, and you’ll get plenty of information, so I encourage you to go and take a look.

One of the things I want to mention before I sign off from this episode is this. Those of you that have retirement accounts and you don’t need to take money out but you’re considering making a conversion from your traditional IRA account into a Roth IRA account or some type of a qualified account into a Roth IRA, here’s the interesting thing to consider. When the market is down, it’s always the best time to convert to Roth IRA. It’s always better than when the market is up because what it means is you’re converting more shares over because they’re at these lower prices. And so, if you say, “I want to convert $10,000 over,” the shares are coming over at lower prices. And if you’re a buy-in holder, which is what I definitely advocate for, it means that you weren’t ever going to sell those shares and you were just going to hold on to them, and you’re allowed to move more shares when they’re at these lower prices or lower valuations, and it can save a tremendous amount of money.

I’ll give you an example. If the market, when it was down about 30% at its lowest point this year from where it started at the beginning of the year, if I pulled the money out of…I’m sorry. If I have the money in my traditional account, the market goes down 30%, I could now in essence…let’s say it was worth $10,000, the market comes down by 30%, I now have $7,000 left in my account. At $7,000, I could then convert over into my Roth IRA and I’ll be taxed at ordinary income tax rate on the $7,000 instead of the $10,000. If I’m in a 10% bracket, I’d be paying $700 to do the conversion as opposed to paying nothing or as opposed to paying $1,000.

Now, here’s the other thing. If you’re in a very low tax bracket or this year with some losses of income and different things, let’s say that this year you might even get down to where you’re paying no tax, now is absolutely the time to be thinking about…while the market is down, now is the time to be thinking about making that conversion and converting over as much income as you possibly can and filling up that “bucket” until you would get into a taxable bracket, have enough income where you would start to have to pay tax or owe tax. There’d be a way to use up that tax bucket, if you will, of not having to pay any tax until your income gets to a place where you’re in that lowest bracket or you might even say, “Hey, that lowest bracket is for me. I’m happy to pay that tax and I’ll go ahead and convert up to the level of that next tax bracket.”

So, just a strategy. Again, not giving any specific advice. I’m not familiar with anybody’s situation and certainly don’t know the details of your taxes and everything else. Please don’t ever take this as personal advice. I would always consult with you to talk to your own individual tax advisor or financial advisor or both and have them take a look at your situation, know your details before you would take action on any of the things that I’ve talked about here in this podcast.

Well, there it is. The coronavirus act, the CARES Act, is allowing us to get access to these funds. If it’s something you need to do, there’s tools and ways to save money. Obviously, whatever we can do to try to keep our retirement funds in and keep holding them, our concept here or the philosophy is buy and hold. The better off that you’ll be in the long-term for your long-term retirement but emergencies happen and no shame in any of that. If you’ve got to go for it, there are some interesting opportunities that have presented themselves here in 2020 that you can take advantage of.

Many, many thanks to you for joining today. This is a wrap for Episode 57. Happy day.

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Join Chief Financial Officer Ken Kaufman as he helps you track and hack your net worth. For those seeking financial independence, your net worth is one of the most significant measurements of success. Using his two decades of financial experience, Ken Kaufman helps you overcome your financial obstacles and look onward towards a better, brighter financial future.


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