About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area, that works with clients virtually across the country. Lamar's work with his clients focuses on budgeting, employee benefits, paying down debt, buying their first home, and investing. Lamar is the Founder of Dream Financial Planning, a virtual financial planning firm specifically designed to help young professionals and minorities take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use the The DREAM Financial Planning Process ™ to help our clients achieve their goals.
Throughout the first half of 2020, citizens around the globe have been feeling the detrimental physical and financial impacts of the COVID-19 pandemic. As of April 21, 2020, deaths in America climbed above 39,000. Throughout March and April, families across the country have continued to practice social distancing and follow strict stay-at-home orders.1
On the financial side, investors everywhere are experiencing the market volatility and economic turmoil of a bear market. While some may have time to “ride out the storm,” retirees and soon-to-be retirees across the country are worried about what all of this means for their retirement.
Below we’re discussing the impact COVID-19 may have on your plans for retirement, as well as recent legislation passed in America that’s designed to bring some economic relief to retirees.
401(k)s & IRAs
On March 11, 2020, we officially entered a bear market. 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 bounce back quickly - 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.
For retirees, this market volatility likely has made some sort of impact on your retirement accounts. Depending on the makeup of your portfolio, the level of impact could vary. But if retirement is already here or right around the corner, this downward trending market could lessen the value of your available funds.
Some pre-retirees may have the option to put off retirement until the market stabilizes, others may 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 2020.2
If you originally planned to take withdrawals from your accounts this year because you were required to do so, you now have the opportunity to leave that money where it is. This gives retirees a chance to let their money grow a little longer and, hopefully, gain back some value lost during the COVID-19 pandemic.
Of course, if you still need to withdraw from your accounts, you can. But for those who were only planning on withdrawing because they had to, this change offers retirees the opportunity to reduce their tax bill come tax season.
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 opportunity is open to anyone who has been impacted directly 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
With this change in policy, the typical 10 percent early-withdrawal penalty has been waived for qualifying individuals (based on the list above) who choose to withdraw before the age of 59 ½. In addition, you have the option to spread 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 any amount early from your retirement plan is a decision that shouldn’t be taken lightly, as you are taking income away from your future retirement. 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 utilizing them or planning to claim Social Security in the near future, there has been no change and you can proceed as planned.
Planning for and navigating retirement income is already a challenge in itself. With the extra stress and confusion brought on by the COVID-19 pandemic, now more than ever you need to have a good grasp on your options. After reviewing the changes in legislation outlined above, it may be best to reach out to your financial advisor. He or she can offer you peace of mind in knowing your retirement will remain on track and help determine how these changes may have affected your retirement on an individual level.
Dream Financial Planning Process ™
Do you know how much you need to retire? The DREAM Financial Planning Process™ is tailored to those who are approaching retirement. With this process, we’re able to uncover untapped opportunities, as well as discover gaps in your current strategy that could be preventing you from enjoying a long and fulfilling retirement. We'll address issues like the timing of taking social security benefits to maximize your benefit. We’ll also discuss the liquidation of your retirement accounts and brokerage accounts to replace your paycheck and sustain spending during retirement in a tax-efficient manner while reducing risk.
With uncertainty surrounding the economic stability of our country, it's okay to have fears and anxieties surrounding your own savings and investments. The most productive course of action from here is to reach out to Dream Financial Planning (or whoever your trusted advisor might be) and discuss your options. It's easy to have knee-jerk reactions when it feels like the bottom is falling out, but it is imperative to make decisions using research-backed data and a level head. If you'd like a Complimentary Review and risk assessment of your investment portfolio feel free to send me an e-mail.
On the first Thursday of every month I send out a monthly newsletter with tips and tricks to help you manage your Finances. In the April Newsletter I discuss the recent economic stimulus package and what it means for you. I also include two downloadable PDFs with quick tips to help you navigate these trying times.
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