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As part of special provisioning, Congress would likely allow all the affected persons with COVID-19 to withdraw $100,000 from their retirement plan. However, before making any decision it is better to consider some pros and cons.
Wall Street investors are eagerly waiting on the sidelines for a fiscal stimulus bill from the Congress. While the Trump administration submitted two bills for stimulus measures, both of them have failed to pass through the Senate. Reacting to this, Dow Jones corrected another 3% crashing 600 points on Monday.
Congress is also flexing its muscles to put more money into the economy. In one of its bills, Congress has proposed that affected savers to be allowed withdrawing $100,000 from their 401(k) retirement plan. Usually, withdrawal from the 401(k) is permissible only after the age of 59 and a half. Any premature withdrawal draws a 10% penalty.
However, looking at the economic scenario, Congress is likely working on special provisioning. Under the framework of hardship distributions, the Senate will allow savers to take emergency withdrawals. Along with individual provisioning, the legislation also allows direct cash relief for families. Families can take paychecks of $1200 per individual and $500 per child. Besides, the legislation also suspends payroll taxes for all employers.
Ed Slott, CPA and founder of Ed Slott & Co., said:
“People play up the relief like it’s a freebie. You’re better off using anything else before using your retirement savings.”
This legislation also gives citizens the facility to pay their taxes over the course of three years. Besides, it also allows them to pay their withdrawn retirement funds in the same time period. However, note that these distributions are not applicable to all.
These are applicable only to those who have either themselves been diagnosed with COVID-19 or one whose or dependent has been diagnosed. Also, those who have experienced a financial crunch in the quarantine period are allowed.
Things to Consider Before Opting for This Plan
Since you’re withdrawing $100,000 prematurely without paying any penalty, you’ll have to pay income tax on the earnings withdrawn. Thus, the hardship withdrawals will be subjected to income tax. However, the good thing is you’ll get three years to pay these taxes, so plan your finances accordingly.
Yes, the provision makes it clear that this is a coronavirus-related distribution. However, you first need to talk to your plan administrator or human resource department before proceeding. “A 401(k) plan or a 403(b) plan, even if it allows for hardship withdrawals, can require that the employee exhaust other sources of money before taking a withdrawal,” said Paul Porretta.
He also says that withdrawing money from your retirement plan should be your last resort. Just when the stock market is plummeting to new lows, this won’t be a great time to cash-in.
“It’s too easy to take money from your 401(k), and it’s too hard to replace,” said Slott. “What if you need more money in six months? Are you going to go back to the well again?”