The CARES Act was passed to help average Americans through the Coronavirus crisis. It still takes good financial decision making to put this money in your pockets. Three common COVID money mistakes involve taking funds from retirement accounts. Avoiding these mistakes can help you save on taxes and keep your finances on track for the long run.
Don’t borrow from your retirement accounts.
The CARES act made it easier for participants in 401(k) plans to take loans from the plan. Taking a loan from a retirement account should be the last option you consider. The loan will need to be repaid with interest. Money you borrow from your retirement plan today won’t be working for you. Money that you withdraw or borrow today won’t be there when you need it in retirement.
Don’t take a hardship withdrawal from your 401(k) or IRA
Most withdrawals from retirement accounts before age 59 ½ are subject to a 10% tax penalty. The CARES act waives this penalty for certain withdrawals if you have suffered financial hardship because of the pandemic. Just because you can take an early withdrawal from your retirement plan does not mean it is a wise decision. Withdrawals are still subject to income taxes. You will also lose the benefit of long-term tax-deferred growth on the amount you withdraw. A retirement plan hardship withdrawal should be the last place you go for cash, and then only under dire circumstances.
Don’t take this year’s RMD unless you actually need the money.
The CARES act has a special perk for those who are already in retirement and are taking required minimum distributions. Retirees have the option to skip this year’s required minimum distribution. Skipping the required minimum distribution means you don’t have to pay taxes on that money until you withdraw it in the future. If you don’t need the cash today, allow it to continue to grow tax-deferred instead.
If you’ve already taken an RMD this year and want to undo it, there are ways to get the money back into your retirement plan and avoid taxes. Avoiding the tax may require some planning and will be easiest if done before July 15th. If you’ve already taken an RMD this year and want to reverse it, seek the advice of a CPA tax professional sooner rather than later.
Although the COVID-19 pandemic has created financial stress for many of us, long-term planning is still important. Before you tap into retirement funds, think about your financial plan. This means leaving retirement savings alone unless there is no other choice.
Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC, FLMI
Chief Investment Officer