Whether unemployed or still working, many Americans are looking for additional funds during the coronavirus pandemic. About 14% of people with retirement savings have taken money from accounts such as 401 (k) s, and from individual retirement accounts to meet this need. Another 13% of those who have savings say they plan to use their pension funds.
This is according to a new survey of over 2,400 US adults surveyed by YouGov on behalf of Bankrate. Bankrate estimates that about 31 million Americans have already withdrawn money or are planning to do so.
To estimate this number, more than 58 million U.S. workers contributed to 401 (k) in 2018, according to Institute of Investment Companywith many others contributing to other forms of retirement accounts. About 85% of Americans have some retirement savings, 2019 Northwestern Mutual Planning and Development Study found.
Although this seems like a large number, it is surprising that so few people withdrew money from their retirement savings to make ends meet, says Blair DuQuein, a certified financial planner and investment adviser from New Orleans in Ritholtz wealth management,
“More than 30 million Americans have lost their jobs since the beginning of March, and we know that most Americans cannot afford car repairs for $ 500, much less finance living expenses for two months,” says DuQuesnay. But instead of having to use retirement savings, many Americans managed to get by with government incentive checks and an extra 600 dollars a week of unemployment benefits.
Nevertheless, given the fact that many people already accept the exit and consider it more, it’s worthwhile to understand how this process works and what steps experts recommend you if you need access to retirement savings.
Congress facilitates access to pension funds
Federal lawmakers not only sought to make it easier for Americans to push through the coronavirus pandemic by signing incentive checks and increasing unemployment benefits, but also loosened the rules for allowing Americans to withdraw money from their retirement accounts if they suffered a pandemic, as part of a $ 2 trillion incentive package In the United States, known as the CARES Act, Americans can withdraw up to $ 100,000 from their retirement savings, including 401 (k) or individual retirement accounts, without a typical 10% penalty.
These lists, called coronavirus-related distributions, are only available in 2020, and only if your employer permits them. Legislation gives Americans three years to either pay income taxes associated with the withdrawal of funds, or to return money, rather than owed to them.
Before the adoption of March legislation, if you needed to get access to pension funds up to 59½, you usually I had to pay a 10% penalty for any amount that you tookas well as income taxes. There were several exceptions to this ruleincluding the cost of education, the purchase of your first home, coverage of huge medical debts, or a court order for child support or child support.
Do not worry if you are plunged into retirement savings
However, while lawmakers have simplified the removal of retirement savings, many experts say that this should not be the first step you take if you are in financial difficulties. First, make sure you explore and exhaust the other options available to you, says Kevin Mahoney, financial director and founder of a Washington, DC consulting firm. Illumint,
Depending on whether you work or not, refinancing your existing debt may help. Or you can use home equity. And don’t forget about family and friends who can help with temporary help. “Regardless of the specific circumstances, retirement should remain as low as possible on the list of possible options,” says Mahoney.
“Withdrawing money from a retirement account is a smart move in the worst financial scenario,” says Mahoney. But make sure that you only take money if you really need it.
If you connect to your 401 (k) or other retirement accounts, make sure you use the money to pay off your outstanding debts or fill the income gap during this difficult time, says Michael Kelly, Ohio CFP and founder of Kelley. Financial planning. Do not bring an extra financial pillow or make a big purchase, such as a car.
And if you took money from retirement savings, take a break, says DuQuesnay. “No one predicted that a global pandemic would cause 30 million Americans to lose their jobs in just six weeks,” she says. “Do what you need to survive the current crisis, and then evaluate the way forward.”
Make a plan to pay for yourself
Although experts say that taking a loan or withdrawing funds from your retirement savings may be normal in the circumstances, you should have a game plan that tells you how you plan to repay the funds, Mahoney says.
“It’s normal if the plan changes more than once in the coming months. And this is normal if you are not quite sure how much you can replace each month or when the account returns to its current balance, ”says Mahoney. “Rather, this exercise is valuable because it reminds you that it is money that you are still going to use in the future.”
If you withdraw pension funds as a loan from your current employer plan 401 (k), you should also make sure that you fully understand the rules for repaying this loan, says Kelly. This is especially true if you end up losing your job. “The payback rules for a former employee can be very different from the current one, and you don’t want to be surprised,” he says.
Loans under plans 401 (k) are not taxable, but you can only take half of the balance in your account and, in accordance with the new rules of the CARES law, not more than 100 000 US dollarsno matter how high your balance is. The CARE Law allows for deferred loan repayments until 2021, after which you will have five years to repay the loan. As a rule, you also need to work in a company to get a loan. Most 401 (k) plans do not offer loans to former employees,
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In the case of a 401 (k) loan, there may already be a process allowing automatic payments directly from your salary. But if you withdraw money associated with the coronavirus, or withdraw it from your retirement accounts, you need to monitor their repayment yourself. In this case, it may make sense to contact your HR manager or provider of plan 401 (k) to set up automatic monthly installments, Kelly recommends. “Here, [you] you don’t need to remember to do this every month, “he says.
In general, it’s best to keep an eye on everything, Mahoney says. In its salary protection loan program guide, the government recommends that people carefully monitor the accounts in which money is stored and how it is used. “Such a strategy can benefit people who have received retirement money,” says Mahoney. If possible, create a separate or sub account to post your withdrawal. Then use the money only in carefully planned cases.
“Ideally, use funds for fixed, substantial expenses that you can no longer cover with other funds,” says Mahoney. If this situation never arises, just keep the money in a separate savings account until you decide that you can safely return the funds to the account associated with retirement, he says.
Keep in mind that in order to repay a loan or distribution associated with a coronavirus, you may need to adjust your expenses to compensate for the drop in retirement savings as soon as you restore your basic income, DuQuesnay says.
Ultimately, typical rules of practice for retirement accounts are not necessarily applied right now, says Mahoney. “We all need to give priority to our short-term financial stability, and we must be able to withstand the extra financial struggle in the coming months.”
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