Taking money out of your savings plans isn’t always your best option. That said, if you’re struggling financially during this pandemic, you may be able to take advantage of these new changes. 

How Taking Money from Retirement Accounts Usually Works

401(k)s and IRAs are savings plans that you use to put away money for retirement. While 401(k) accounts are typically set up by a traditional employer, you can also set up a solo 401(k) if you are an independent contractor. 

There are annual limits to how much money you can contribute to your retirement accounts. These contributions are tax-free, so whatever you put away in your retirement accounts you won’t have to pay taxes on. This saves you money at tax time!

Money in your 401(k)s and IRAs is meant to be left alone until you’re age 59 1/2. If you take money out early, you can be fined. Also, contribution limits make it difficult to add more savings and “catch up” on earnings later on. You miss out on bigger investment growth over time, and you won’t have as much money when you retire. 

Accessing your retirement savings should be a last resort, but if you really need the money, there are two ways to get it: 

• You can withdraw money (called a distribution) from your accounts. Except in some situations, you owe income tax and a 10% penalty on any money you take out. 

• You can borrow money from your 401(k) account (like a loan). You are allowed to borrow a maximum of 50% of your balance, or $50,000, whichever is less. You will establish a payment plan and need to repay the money with interest within five years.  

New Exceptions During the COVID-19 Pandemic

Because the COVID-19 outbreak has caused financial stress for so many Americans, the Trump administration has allowed hardship withdrawals. This means that the rules about retirement plan contributions and distributions have temporarily changed! 

First things first: to take advantage of the new changes, you must be a qualified individual. This means that you meet one of these requirements:

• You have been diagnosed with COVID-19

• You have a spouse or dependent who has been diagnosed with COVID-19

• You have been affected financially because of being quarantined, furloughed, laid off, or having work hours reduced

• You are unable to work because you lack childcare as a result of the pandemic

• You own a business that has closed or has reduced hours because of the pandemic

If you meet any of these requirements, you are eligible to take advantage of temporary changes to retirement plan regulations. 

• Change #1: Penalty-Free Distributions

  You have until December 31, 2020 to take up to $100,000 out of your retirement savings. You will not owe the 10% tax penalty. You can pay this money back to your account within three years. If not, you’ll be taxed on your distribution, but you can take three years to pay those taxes back, as well.

• Change #2: Bigger Loans

  If you have a 401(k) plan, you have until September 23, 2020 to borrow $100,00 or 100% of your balance, whichever is smaller. There are no taxes or penalties associated with this loan, but you will pay interest; you can delay repaying your loan for up to one year. 

• Change #3: More Time to Contribute

  IRA contributions for the 2019 tax year have been extended to the new tax deadline: July 15. This means you have extra time to add more money to your savings accounts. If you haven’t hit your contribution limit and you have savings available to invest, this may be a good opportunity to maximize your contributions and save money in tax dollars. 

Remember: Tapping into retirement savings is not an ideal choice, even with these new changes! Because of recent drops in the stock market, your retirement accounts are worth a lot less right now than they will be in the future. Unless you need the funds immediately, it will most likely be in your favor to keep your money in an account that can grow over time.