Posted by Introduction: Under the CARE Act, inNew Coronary Pneumonia OutbreakDuring the period, affected US residents can nowNo penaltyWithdraw up to $401 from 100,000(K)s and IRAs retirement accounts.But is this a good idea?
Due to suddenepidemicAs a result, the unemployment rate has soared, and American residents are subject to the difficulties of unemployment and living expenses.The US Congress launched a $3 trillion economic stimulus plan at the end of March. One of the policies is that Americans can now withdraw up to $2 from individual retirement accounts, including 401(K)s and individual retirement accounts, and Waiver of fines.
This clause is called "New Crown Outbreak"Relevant withdrawal" clause, which is only valid in 2020.
Withdrawal regulations before the epidemic
Before the epidemic, if money was withdrawn from the 59.5(K)s account before the age of 401, a fine would be incurred.The amount of the fine is 10% of the withdrawal amount.At the same time, a 20% tax will be automatically deducted from this expenditure.
Now, these rules that have been running for many years have changed in 2020.
Who is eligible for the penalty-free withdrawal?
The most straightforward one is that if we, our spouse, or people who depend on us to live and support are diagnosed with COVID-19, then we can be exempted from fines to withdraw money.
The "New Crown Epidemic-related withdrawals" clause extends this most basic provision and further expands the scope of withdrawals without fines.
According to the announcement issued by the IRS on June 6,Any individual, individual’s spouse or individual’s family member has encountered the following “adverse financial conditions” caused by COVID-19,The money can be withdrawn without a fine:
- Be quarantined, on leave, or fired
- Working hours are reduced
- Job opportunities are cancelled, postponed, or our income (including self-employment income) decreases
- Unable to go to work due to lack of childcare
- Reduction of business hours due to the outbreak of the epidemic, or suspension of business
The above conditions have greatly expanded the scope of penalty-free withdrawals. Even if we are still at work, we may still withdraw money from our personal pension accounts in advance without penalty in accordance with the "new crown epidemic-related withdrawals" clause.
Should I take money from my account?
Although the IRS further specified the terms of “withdrawals related to the new crown epidemic” in June, this does not mean that all qualified people are encouraged to use the money.Is it a good idea to get money in advance?What are the unfavorable consequences for us?
Before taking the money, the following factors are worthy of our careful consideration.
Consequence 1: Impact on retirement income
Every penny we withdraw from 401(k) or IRAs in advance will directly affect our income after retirement.
If there are 401 yuan from 10(K) or IRAs, at this time, we have extracted 1 yuan from it to pay various bills.Although the money is free of fines, if we don’t return it, the tax rebate generated when the money was deposited that year may have to be recalculated. At the same time, we will also lose the long-term accumulation benefits that time has brought us.
According to the 6% average annual forecast interest rate, 10 yuan can increase to 20 in 32 years, and after withdrawal, the remaining 9 yuan can only increase to 28.8 yuan. Due to the time factor, the difference of 1 yuan, It can become a difference of 3.2 at the time of retirement, as shown in the figure above.
(>>>Recommended reading: gadgets｜The American Personal Pension Smart Calculator, how much do I need to save every month?）
Consequence 2: May be sold at the wrong time
The vast majority of people’s 401(K)s or IRAs have chosen mutual funds or other investment products that participate in the market.
If we want to withdraw money from the retirement account in advance, it means we need to sell these investment products in advance.When the market has experienced a sharp decline, selling these investment products means that we accept the current loss.
In the first quarter of 2020,Standard & Poor's 500 IndexIt has experienced the biggest quarterly decline in history.And one thing is certain: as long as we do not sell, we have no actual loss.Only when we actually sell, will there be actual losses.
Article summary
Although during the epidemic, the IRS and Congress provided us with an option for funding sources,But using the money in the retirement account should be our last resort.
If you intend to take this opportunity of no fines to take out a sum of money for early consumption, then this kind of behavior is not worth promoting.If in order to relieve the pressure of high-interest debt, or to repay the mortgage or pay the rent, or pay for the family’s food or medicine, then as emergency funds, this money can play a role in helping people in need.
If you do decide to withdraw in advance, one way to minimize the negative impact in the future is to withdraw only the absolutely necessary amount of funds and repay the amount within three years-the sooner the better.
