The latest news looks like Colorado will be ending stay-at-home orders as early as next week, however, given recent events many will not be returning to their normal routine for quite some time. While some people have been less personally, professionally, and financially impacted, many are left needing quick access to cash while others are now being forced to find new jobs.
Even with these events, we remain optimistic that our economy will eventually bounce back, and that given enough time things will return to some form of “normal”. While we hope for a quicker recovery and are confident that this too shall pass, it is important to remind workers about their options if changing jobs, or, needing to access cash within their retirement plans.
Unexpected Job changes due to COVID-19: What are your options with your retirement plan?
When you change jobs and have an old retirement plan at your previous employer it is important to know your options.
- Rollover to an IRA (Individual Retirement Account)- “Some of the top reasons to roll over your 401(k) into an IRA are more investment choices, better communication, lower fees, and the potential to convert to a Roth account.” (Per Investopedia January 2020). Many people use an IRA to consolidate retirement accounts throughout their careers as they change jobs. This keeps management simple and allows for all retirement funds to be managed & invested according to specific goals, time horizon and risk tolerance.
- Leave your account in the old plan- Depending on the rules of your specific employer-sponsored retirement plan, you may be eligible to leave your account where it is without making changes. You will likely not be able to continue contributions; however, the investments will remain as they were when you separated from service. Things to consider include investment options, fund expenses and fees.
- Move to the new plan- If your new employer has a retirement plan it may be able to accept your old account(s) in the form of a rollover. As with any retirement account decision, you should consider the pros and cons of each option and make the decision that is in your best interest. Many like the idea of consolidating old plans into the new employer plan to help simplify where their retirement assets are held, much like the mindset of the IRA consolidation listed above.
- Cash out- This is an option, like how gas station sushi is an option. In taking a cash distribution from your retirement account with no intention of paying it back, you must claim the account balance as income for that year and pay ordinary income tax on that amount. There is a chance this could push you into a higher tax bracket. Early distribution penalties are potentially waived if you have been impacted by Covid-19. If you must access and use the money now consult with a tax professional to understand the impact (as mentioned above the CARES Act has, in some cases waived penalties and broadened tax flexibility).
** We would advise extreme caution and checking in with your trusted advisor before taking action on a distribution from an IRA. Although, the CARE act has made it easier and more cost efficient to access during this time, it could prove to be detrimental to your long-term retirement planning. **
Considerations for your current 401k plan if you need money…
Taking a distribution
“The CARES Act from Congress eliminated the 10% early-withdrawal hit, and 20% federal tax withholding, on early 401(k) withdrawals for those impacted by the crisis. While you will owe taxes on that sum, since the original contributions were pre-tax, that amount can be spread over three years. Usually, it’s due in same year in which you make the withdrawal.” (Per Money.com April 15,2020)
Should you access funds in a 401k early? The general answer is no, unless you don’t have any other options. Many are already living paycheck to paycheck so there may not be a lot of options, but when you look at the consequences of accessing your 401k early it does not make sense for most people. This money is earmarked for retirement and should not be used unless it is an emergency.
What about a loan?
“Instead of this nuclear option of early withdrawal, look to the 401(k) loan as a potential alternative. The CARES Act is making changes there, too: In the past, you have been allowed to borrow up to 50% of your account balance, or $50,000, whichever is less. But now, you are permitted to borrow up to 100% of your balance, or $100,000, whichever is less. The idea is to pay yourself back in installments, without creating any big taxable events. And for outstanding 401(k) loans with payments due in 2020, the CARES Act provides that you can suspend payments for up to a year.” (Per Money.com April 15, 2020)
For many a loan may be a better alternative to taking a distribution from your 401k, but a loan may not be available in all plans. While a loan may be a better alternative to taking a distribution, it should be avoided if possible, to not derail your retirement goal.
As always, we want our clients and those in our community to know that our team at Varra Financial continue to be available to help. If you or anyone you know has questions, please reach out to our office.
The Opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Withdrawals from your IRA or 401(k) prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.