The last year has thrown us curveballs in the form of how we work, get together with friends, and spend time with our families. It’s affected little things, like how we run errands. It’s even changed how we celebrate weddings, holidays, and more. And now, it’s affecting retirement plans.
Because there are a lot of things up in the air, people are rethinking what they’re doing with their money. Some may even be tempted to use the money they’re saving for retirement to make it through this time of uncertainty. But is that the best plan for the future?
Let’s look at some of the ways you could get your hands on some of those retirement dollars, and what effect that may have on your taxes, come tax season.
Getting Money From Your IRA or 401(k)
There are a couple of ways you could leverage your retirement account like an IRA or 401(k) to get money you can use now to pay bills or make purchases. Each should be weighed carefully, though. Both might help you in the short term but may have long term effects.
While normally it is never recommended to withdraw from your retirement account, the first CARES Act waived the 10 percent early withdrawal penalty (on up to $100k of retirement funds) if you qualify. This means, if you or a spouse or dependent tested positive, or you lost your job because of COVID, you could still pay your bills by using money taken from your retirement account, without the normal penalties.
Late on December 27, 2020, the president signed into law the second round of stimulus: the Coronavirus Response and Relief Supplemental Appropriations Act of 2021. This includes several “tax extenders”, and extends the waiving of the retirement withdrawal penalty. (NOTE: This new law is currently in legislation. TurboTax is updating the latest information here as it becomes available.)
While you may be able to withdraw money without penalties, it does affect your taxes. The CARES Act currently allows the borrower to pay the taxes on the withdrawal over three years, rather than all at once, but this will still be something to consider when filing your taxes. And while Roth IRAs are often free from tax and penalties, you may still make an unqualified withdrawal if it was converted from a traditional IRA within the last five years.
Often, even without a penalty, it doesn’t make financial sense to withdraw money from an IRA, 401(k), or even a Roth account early.
Taking Out Loans
Another way people are leveraging their retirement accounts to get money they can use immediately is by taking out loans against their accounts. The CARES Act increased the amount available to take out to $100k. If you know you can pay the money back, then a loan may be a better option for using retirement dollars to work for you immediately.
This way, your investment keeps earning returns, and you still have cash on hand to use. As long as you meet the rules of repayment, a loan like this isn’t taxable now, and it won’t cause you to pay more taxes in retirement.
Stopping Retirement Contributions
Another way to get cash now is simply to stop contributions to your retirement account, for example, by reducing the amount from your check that automatically goes to your retirement account.
This may seem tempting but remember that you’re still taking money out of your long-term savings to deal with a short-term situation. Plus, if your employer matches a part of your contributions, you’ll be missing out on that bonus money. That said,
Using Your Stocks
Some people have stock market accounts in addition to their IRAs and 401(k)s. If you have stocks, that may be another way to find money in an economic downturn.
Many people panic-sell when things start to turn bad. It’s understandable. Seeing one’s savings or retirement accounts start to go down will send a shiver down anyone’s spine. But generally the market rises and falls. Just because we are struggling now, doesn’t mean the market won’t rebound, along with the country.
Financial advisors learned a lot in 2008’s crash. Investors who kept their money in the diversified portion of their investment portfolios did better than those who sold when things got turbulent. It’s nearly impossible for an average investor to predict the best times to buy and sell. It’s often best to leave the money alone and wait for the market to rebound.
It may seem contradictory, but while the market is down, it may be the better time to buy stock. Think of it like a sale—if you have the money to invest, it may be profitable in the long term.
Different Filings for Different Situations
Whether you’re thinking about selling stocks to get immediate cash, investing in new ones for the future, withdrawing early retirement funds to pay bills, or stopping your contributions, you may be impacted on your taxes this year (and in the years to come).
While we’re the experts on retirement planning, we partnered with the experts at TurboTax to learn about ways to maximize benefits and reduce the tax burden.
And right now, you can even get $20 off when you file your taxes with TurboTax! Their software walks you through your specific situation, asking the right questions to help you navigate taxes as you make a few changes to adjust in this economic downturn.
Remember, the market tends to correct itself, and long term planning shouldn’t necessarily be tossed aside for short term panic. That being said, Bankers Life can help you make adjustments in your retirement planning. Schedule an appointment with a Bankers Life agent, today.
This material provides general information about the described insurance product(s) for educational purposes only. This is not intended as investment advice or to recommend the insurance product(s).
The Company and its producers do not provide legal or tax advice. Each individual should seek specific advice from their own tax or legal advisors. The general and educational information presented in this material is a sales and marketing piece for insurance products offered by Bankers Life and Casualty Company.