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4 Ways Your Retirement Accounts Have Changed Due to Coronavirus

By Katie Brockman - Apr 4, 2020 at 11:02AM

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There are new rules surrounding your retirement fund, and they can potentially save you some cash.

The COVID-19 pandemic has affected nearly every aspect of Americans' daily lives, especially from a financial perspective. Roughly half of U.S. adults say their personal finances have been threatened by the coronavirus, according to a recent survey from Pew Research Center, and nearly 90% of Americans are concerned about the impact the virus will have on the U.S. economy.

Recently, Congress passed the Coronavirus Aid, Relief, and Economic Security Act to provide relief for those struggling financially because of COVID-19. Not only will millions of Americans receive stimulus checks, but the bill will also affect your retirement accounts in a few ways.

Man holding hundred dollar bills.

Image source: Getty Images.

1. You can make hardship withdrawals without facing penalties

If you're facing significant economic hardship and can't afford to pay your bills, you may choose to tap your retirement fund. Typically, when you withdraw your savings from your 401(k) or traditional IRA before age 59 1/2, you will have to pay a 10% penalty on the amount you withdraw. However, you can now withdraw up to $100,000 from your retirement account without paying the 10% penalty.

One caveat to the new rule is that to avoid the penalty, your withdrawals need to be for coronavirus-related expenses. This means that to be eligible for these penalty-free withdrawals, either you or a loved one must have tested positive for the virus, or you must have experienced financial consequences due to job loss, reduced hours, or quarantine.

Just keep in mind that withdrawing from your retirement fund should be a last resort, because it can potentially throw off the rest of your retirement plan. But if you're out of options and desperately need the cash, this new rule can make it easier to access your savings.

2. Income taxes on withdrawals can be paid over three years

When you withdraw money from your 401(k) or traditional IRA before age 59 1/2, not only are you subject to a 10% penalty, but you will also need to pay income taxes on your withdrawals. Even if you are eligible to avoid the 10% penalty by making coronavirus-related hardship withdrawals, you'll still face taxes on the amount you take out of your retirement account.

However, under the new regulations, you now have three years to pay income taxes on your distributions. If you're struggling financially, being able to defer those tax payments can go a long way.

3. You can borrow more from your 401(k) and take longer to repay the loan 

Borrowing money from your 401(k) is sometimes wiser than withdrawing, because it can help keep your retirement savings on track when you're required to repay the amount you borrow. In general, the rules surrounding 401(k) loans are that you can only borrow up to $50,000 or half the amount in your retirement account (whichever is less), and you typically have to repay the loan within 5 years.

Under the new coronavirus rules, though, you can borrow 100% of your vested account balance up to $100,000. In addition, you'll also have an extra year to pay back your loan. Keep in mind, though, that just because you can borrow this much doesn't necessarily mean you should. Repaying your loan (with interest) could potentially put a strain on your budget over the next several years, so if you decide to borrow from your 401(k), only borrow the minimum amount you need to make ends meet.

4. Retirees can delay taking required minimum distributions

Generally, you have to start withdrawing money from your 401(k) or traditional IRA at age 72. These are called required minimum distributions (RMDs), and they exist because your investments in these types of accounts are only taxed when you withdraw your money. Because Uncle Sam wants his cut eventually, the IRS requires you to start withdrawing your cash at age 72 so it can collect taxes.

But because it's not always wise to withdraw your investments during a recession, the new regulations allow retirees to delay taking RMDs for a year. That means if you're turning 72 this year and would normally be required to begin taking RMDs, you can wait until next year to start. This gives the stock market more time to recover, so you're not locking in losses by withdrawing your money when the market is down.

Coronavirus has changed many aspects of society, and it's affecting retirement accounts as well. If you're struggling financially and need some extra help, these new regulations are designed to make life a little easier.

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