Changes to Retirement Accounts due to the COVID Stimulus

Changes to Retirement Accounts due to the COVID Stimulus

Kim Pinnelli

by Kim Pinnelli
Senior Contributing Writer

April 1, 2020
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Changes to Retirement Accounts due to the COVID Stimulus

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Even if you aren’t 59 ½, there are relaxed coronavirus retirement account guidelines, giving you access to your funds.

In today’s trying times, rules and guidelines of all types are being relaxed, including requirements on 401(k) account withdrawals and loans. The standard withdrawal rules, and even those regarding 401(k) loans, have been relaxed if you’ve been affected by the Coronavirus.

Who Qualifies for the Coronavirus Retirement Account Relaxed Guidelines?

As a part of the Stimulus Bill, anyone that has been affected by COVID-19 (directly or indirectly) has more lenient access to their 401(k) retirement fund. A person that’s directly affected would be someone who is diagnosed with the illness (if your spouse is diagnosed, that counts).

Those indirectly affected include the following:

  • People that lost their job due to a company being unable to operate
  • People that lost hours or were forced to take time off due to coronavirus
  • People unable to work because they didn’t have childcare for their children that are now home from school
  • People that were forced to close their business due to being a non-essential business

If you qualify based on one of the above situations, you can take advantage of any of the new guidelines.

No Retirement Penalties

Before coronavirus, retirement account withdrawals were only allowed once you are age 59 ½. Non-qualified withdrawals were previously subject to a 10% penalty, plus the taxes owed on the withdrawal. Today, you can withdraw up to $100,000 without paying the penalty.

If you don’t repay the funds within three years, you’ll have to pay taxes on the amount withdrawn. You have up to three years to pay the taxes if you don’t replace the funds within that time.

You Can Borrow More from Your 401(k)

Before coronavirus, retirement account loans were allowed, but only up to $50,000. Now, assuming you meet one of the requirements above, you can borrow up to $100,000 from your retirement account and the maximum 50% of your vested amount rule doesn’t apply.

As is normally the case, you must repay the amount, and the repayment must still be made within five years. Typically, you have to make regular payments, but many administrators are relaxing the guidelines. Most administrators may still require regular quarterly payments, but you may ask about alternatives if that’s not an option.

Required Minimum Distributions Don’t Apply

Anyone over the age of 72 is normally subject to a Required Minimum Distribution, which must be taken each month, whether they need it or not. For the remainder of 2020, though the Stimulus Bill waived that requirement –  you aren’t required to take any distributions this year if you don’t need to. This is helpful for retirees who may have seen the value of their accounts go down recently, and want to give the market time to recover before taking distributions.

Should You Raid Your Retirement Account?

Should you take advantage of the relaxed coronavirus retirement account guidelines? Unless you have no other options, it’s probably not the best idea. You’ll want to have those retirement funds when you do retire.

Taking the funds out now will lock in the losses everyone has seen as the stock market has fallen since February. It also puts you on the hook for repayment, and could leave you with a hefty tax bill.

If you must use retirement funds early due to Coronavirus, make sure you know the full implications on your financial life before doing so.