Starting in early March and continuing through April, American Families have continued to practice social distancing and follow strict stay-at-home orders. It's no secret our fellow countrymen are beginning to feel the mental and physical strains due to the impact of the COVID-19 pandemic. As of April 21, 2020, deaths in America climbed above 39,000.1
From a financial standpoint, all investors are experiencing the market volatility and economic turmoil during this historical bear market. While younger individuals may have time to “ride out the storm,” retirees and soon-to-be retirees across the country are worried about what this means for them and how it will affect their retirement.
Here we want to discuss the impact COVID-19 may have on your plans to retire, as well as recent legislation passed by our leaders to bring some economic relief to retirees and a respite from extremely volatile markets for all participants.
401(k)s & IRAs
We officially entered a "bear market" On March 11, 2020. We call it a bear market because a bear swats downward when it fights as opposed to a bull which thrusts upward with its horns during a fight. And as we continue to endure this pandemic, the market continues to experience volatility. Even after the pandemic passes, there’s no guarantee the market will get back to where it was when the pandemic started - no one can know for sure what will happen in the coming months. Businesses are shutting their doors, investors are worried, and overall financial confidence is low.
A bear swats downward as it fights compared to a bull which thrusts upward with it's horns during a fight. That is why we call it a Bull or Bear market. We are referring to the constant fight between the two.
For retirees, there is a good chance this market volatility has made an impact on your retirement accounts. Depending on the makeup of your portfolio, the actual impact could vary. But if retirement is already here or right around the corner, this downward trending market could force you into a negative sequence of returns and lower the value of your available funds.
If you are lucky enough to have maintained your job through this time, you may have the option to put off retirement until the market stabilizes, unfortunately, many do not. In an attempt to help retirees and pre-retirees facing financial difficulties, the government has passed the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act - which can impact your 401(k), IRA or other retirement accounts.
The CARES Act Impact on 401(k)s and IRAs
Here are some ways in which the CARES Act has created financial savings or relief opportunities for those nearing or in retirement.
Waiving Required Minimum Distributions
In Section 2203 titled, “Temporary Waiver of Required Minimum Distribution Rules for Certain Retirement Plans and Accounts,” those who are typically required to take minimum distributions from their retirement savings accounts will not be required to do so for the remainder of 2020.This applies to Inherited IRA's as well.2
If you going to take withdrawals from your retirement accounts this year due to this requirement, you can choose not to. The opportunity to leave that money in the account is significant as it gives retirees a chance to allow their money to hopefully grow and, possibly gain back some value lost during the COVID-19 pandemic.
Of course, if you still need to withdraw from your accounts, you can and should. But for those who were only planning on withdrawing because the government says you have to, this change offers retirees the opportunity to reduce their tax bill and allow their accounts to potentially grow for another year.
Penalty-Free 401(k) and IRA Withdrawals
As established in Section 2202 of the CARES Act, you have the option to withdraw up to $100,000 from your 401(k), 403(b) or IRA account.2 This is open to anyone as long as you have been directly impacted by the COVID-19 pandemic.
Examples of qualifying impacted individuals include:
- Someone who has contracted the virus
- Those caring for an immediate family member who has the virus
- Anyone experiencing financial distress due to being furloughed or laid off during the pandemic
- Business owners who needed to cease operation or reduce hours
- Any additional circumstance in which the IRS deems acceptable2
So what does this mean? The typical 10 percent early-withdrawal penalty has been waived for qualifying individuals (based on the list above) if you choose to withdraw before the age of 59 ½. Additionally, you won't have to pay the taxes on this money immediately, instead you can defer paying the tax liability of this additional income over the next three years.
Other types of retirement plans, such as money purchase pension plans or defined benefit and cash balance plans, are not discussed in the CARES Act in regards to penalty-free early withdrawals. Therefore, as of April 21, the penalty-free early withdrawal option does not apply to these types of plans.
Withdrawing money early from a retirement account is a decision that should not be taken lightly, as you could be putting your future retirement in jeopardy. This is something we typically advise against, however, we understand the unprecedented times we find ourselves in as a nation. If you are in a situation in which you are considering this option, it’s wise to speak first with your financial advisor, as they may be able to present other options.
Tax Deadline Extended
On March 21, 2020, the IRS and Treasury Department announced an extension for tax filing and payments. This means that Americans have until July 15, 2020 to file their federal tax return.3 How does this affect your retirement? Because you now have three extra months to contribute money to your 401(k) or IRA. This means that if you’d neglected to contribute as much as you wanted to your retirement accounts, you have some extra time to do so. Plus, contributing now can help lower your tax obligation for the 2019 tax season come July 15.
What About Social Security?
COVID-19, as of mid-April, has had no impact on current Social Security benefits. If you’re already receiving benefits or planning to claim your Social Security benefits in the near future, there has been no change and you should proceed as planned.
Planning for retirement is already a challenge in and of itself. When you pair that with the added stress and confusion brought on by the COVID-19 pandemic, now more than ever you need to have a good understanding of your options and how best to navigate them. After reviewing the changes in legislation we have outlined above, it may be best to speak with a financial advisor. We can offer you some calm in the middle of this calamity with specific guidance to keep your mind at ease, retirement plan on track and help determine how these changes may have affected your retirement at an individual level.
|About the Author|
James M. Comblo , CFF
is a Partner and the Chief Compliance Officer at FSC Wealth Advisors. His greatest passion in the financial services industry is helping clients accomplish their dreams both with investments and their personal lives. To learn more about him click here.
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