Millions of Americans have been directly affected by the coronavirus pandemic, from both a health and financial perspective. With thousands of businesses shuttering to slow the spread of the virus, approximately 10 million workers have filed for unemployment benefits in the last two weeks.
The $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act aims to provide relief to individuals and businesses facing financial hardship due to the coronavirus. One of the most popular aspects of the bill is the $1,200 stimulus check millions of Americans will be receiving, but there’s also one lesser-known feature of the bill that could boost your retirement savings.
Helping your savings last longer
Under the new stimulus bill, retirees will not have to make their required minimum distributions (RMDs) for 2020.
Normally, retirees age 72 and older are required to withdraw a certain amount from their 401(k) or traditional IRA each year. This also applies to those who turned 70-1/2 in 2019, because these retirees would have to start taking RMDs in 2020. The SECURE Act that passed in December changed the age retirees have to start taking RMDs to 72.
Traditional IRAs and 401(k)s are tax-deferred, meaning you don’t pay taxes when you make the initial contribution, but you do owe taxes when you make withdrawals. The IRS wants its money eventually, so if you haven’t begun withdrawing from your retirement account by the time you hit those key ages, RMDs require you to start.
If you would normally be required to take a RMD this year, this new rule can help your savings last longer. It’s best to avoid making withdrawals from your retirement fund during a market downturn if you can help it, because withdrawing now means you’re essentially locking in your losses. It may feel like you’ve already lost a lot of money, especially if your account balance is significantly lower now than it was a few weeks ago. However, you haven’t technically lost any money until you sell your investments, so selling now when the market is at rock bottom could cost you.
By not taking a RMD in 2020, you can leave your investments alone and give them more time to recover. The market will bounce back eventually, so by not withdrawing from your retirement fund now, you can help your savings bounce back as well. Hopefully by next year the market will be in better shape, so your investments will be worth more.
Other rules that can help investors
The new RMD rule mainly benefits those who are already in their 70s, but there are other regulations in the stimulus bill that are designed to help younger workers.
For one, you’re now allowed to withdraw up to $100,000 from your retirement fund without paying a penalty. Normally, withdrawing from your 401(k) or traditional IRA before age 59-1/2 means you’ll have to pay income taxes and a 10% penalty on the amount you withdraw. Now, you can avoid that penalty as long as you’re withdrawing the money for coronavirus-related expenses. While you still have to pay income taxes on your distributions, those tax payments can now be spread out over three years.
In addition, workers can now borrow more from their 401(k)s and take longer to repay the loan. Typically, you can only borrow 50% of your vested account balance up to $50,000, and you normally have to repay the loan within five years. Under the new stimulus bill, you can borrow 100% of your vested account balance up to $100,000, and you have an extra year to repay the loan.
Keep in mind that it’s not ideal to take money from your retirement savings before retirement, because that makes it harder for your investments to grow. But if your financial situation is dire and you have no other options, these new rules can make it a little less expensive to tap your retirement fund.
COVID-19 has wreaked havoc on the stock market and millions of Americans’ lives, and these are trying times for many families. By taking advantage of these new regulations, though, you can take steps now that might make the future a little brighter.