Retirees and pre-retirees considering qualified retirement accounts to survive tough times just got a tax break.
The new law retirement loan provisions are designed for anyone “who experiences adverse financial consequences as a result of being quarantined or being furloughed,” according to the recently passed $2 trillion stimulus law.
The law has tax reduction benefits for those who need to borrow from their qualified retirement accounts—such as 401(k)s and IRAs that qualify for tax deferral—and for retirees who must take money from retirement accounts each year and now worry about selling in a market crash.
Retirees won’t be required to take minimum distributions this year. That’s good because retirees generally benefit from deferral. The longer one delays using qualified retirement funds, the more they can compound. Compounding, advisors say, is critical in achieving a retirement goal.
Retirees, those ages 70-72, can now wait a year to take a required minimum distribution from a qualified plan. This gives these beat up accounts time to recover.
“Given that retirement plan account values are down, keeping whatever funds there in place may be a better strategy in order to fuel future growth as the markets begin to recover,” says Sallie Mullins Thompson, a Manhattan advisor.
“Most of my clients are choosing not to take the distributions because they didn’t need the money and this gives them a tax advantage,” says Charles Hughes, an advisor in Bay Shore, New York.
Hughes thinks deferred tax retirement accounts are so valuable that he tells clients to take as little as possible each year and generally take a distribution at the end of the tax year.
Those not retired, who need cash to survive, can withdraw up to $100,000 without the normal 10 percent penalty that attaches to premature withdrawals before age 59.5. But the loan must be paid back in three years.
Thompson says try to avoid borrowing from a retirement account. So what should someone do who needs cash?
“The enhanced unemployed benefits would be at the top of my list. Max those out first, along with any emergency fund savings, before raiding your retirement plan,” Thompson adds.
But another advisor notes the benefit of borrowing.
“These can be great options for those that need resources to get through this difficult time. I recommend utilizing these especially if the alternative is accumulating credit card debt,” says Tony Matheson, an advisor in Sacramento, California.
But Diane Pearson, an advisor in Wexford, Pennsylvania, believes “you should only take loans from your retirement accounts if you have exhausted all other resources.”
Another option, she says, a zero percent interest credit card.
