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Retirement Plan Pros Speak Out on CARES Act From a Fiduciary Perspective

Retirement Plan Pros Speak Out on CARES Act From a Fiduciary Perspective
April 07
00:04 2020

The CARES Act has loosened the restrictions on taxing money out of retirement plans. Of course, there are some strings attached, but the rules are pretty straight forward. The allowance to take more loan money or take penalty free withdrawals is one thing. It’s quite another to determine if that’s the right thing to do in the first place. And, to throw a twist in the matter, the CARES Act actually makes it easier to keep money in retirement plans.

Confused? FiduciaryNews.com spoke with retirement experts from across the nation to get their take on the CARES Act. Here’s what they had to say.

Allison Brecher, General Counsel at Vestwell in New York City, says, “The CARES Act provides three main areas of relief to participants:

  1. They can access up to $100,000 from their plan if they, a spouse, or dependent has been diagnosed with COVID-19 or they have suffered adverse financial consequences, such as if they’ve been laid off or furloughed, quarantined, received reduced hours, or found themselves unable to work because they need to provide childcare. The Act waives the 10% penalty for early withdrawals from the plan and the ordinary tax withholding, so this relief is now available to any participants of any age who meet those requirements, and the taxes on the distributed amount can be spread out over three years. Additionally, and we think this is particularly important, participants can contribute all or a portion of that distribution back into the plan over the next three years.
  2. Participants can now take out a higher amount of a loan from their plan. Before this crisis, loans were limited to the lesser of $50,000 or half of the vested balance in the participant’s account. The CARES Act increased that to the lesser of $100,000 or the full present value of the participant’s vested account balance. Loans, even from a participant’s own retirement plan account, do need to be repaid, but the repayments can be delayed by up to one year.
  3. Participants who are turning 72 this year would usually be required to start taking distributions from their plan, but the CARES Act allows employers to waive that requirement. This could help older workers stay in the plan longer, giving investments time to hopefully rebound.

For context, retirement plans need to be operated consistently with their terms. So if a plan does not currently allow any of those provisions, the plan needs to be amended. The CARES Act gives employers plenty of time to make the amendment – until the end of the 2022 plan year – but employers should work with their service providers now to let them know of their intention to allow this participant relief.”

Eligibility to obtain this relief is fairly broad. “This is a true win for those of us that have IRAs and/or 401k and own a business,” says Jennifer Kem, CEO of and Founder of Master Brand Institute in San Francisco, California.”

Kem says the CARES Act contingencies apply to “an individual who: Is diagnosed with COVID-19; Whose spouse or dependent is diagnosed with COVID-19; Who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or Other factors as determined by the Treasury Secretary. (So, pretty much all of us.)”

This isn’t free money. It comes at a price. Many naïve folks might be salivating at the prospect of releasing these big bucks from the prison of their retirement plan… until they read the fine print.

“The CARES Act waives the 10% early withdrawal penalty for up to $100,000 of your retirement assets – which will help those who need to tap into their retirement savings due to Coronavirus-related expenses if there are no other options available,” says Amin Dabit, Vice President of Advisory Service at Personal Capital in Denver, Colorado. “However, it’s important to remember that those withdrawals are still taxable as it will be considered income and there are other considerations as well. You should plan to speak to your professional tax advisor for a personal recommendation on the best course of action based on your situation given this will vary by individual.”

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Fortunately, as Brecher mentions, the payment structure of those taxes has been altered. “The CARES Act makes it easier to withdraw money from retirement accounts by changing two key rules related to premature withdrawals for those either diagnosed with COVID-19 or facing negative financial consequences, such as a layoff or income cut, because of it,” says Christy Bieber, a financial writer with The Ascent based in Lutz, Florida. “You can pay taxes owed on your withdrawal over three years. Normally, you’re taxed at your ordinary income tax rate and must pay your bill by Tax Day of the year the withdrawal occurred.”

In the final analysis, however, it must be understood that premature withdrawal from retirement plans may not be in the best interests of the retirement saver.

“I see only cons and no pros from borrowing or withdrawing early from a 401k,” says Robert R. Johnson, Professor of Finance in Heider College of Business at Creighton University in Omaha, Nebraska. “The choice to save for retirement is a choice between current consumption and future consumption. It is very difficult for many people to imagine their future self and give up that vacation or new car today in lieu of having money to retire on in the distant future. In 2017, University of Chicago Professor Richard Thaler received the Nobel Prize in economics for his work in behavioral finance. The premise of behavioral finance is that human beings aren’t rational profit maximizing machines, but often succumb to behavioral biases. One of the biggest behavioral biases that humans succumb to is the bias toward immediate gratification over delayed gratification. That is, our present selves tend to win over our future selves.”

Perhaps, if you care about yourself and unless you really need it, you might just take a pass at removing money from your retirement savings before you retire.

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on TwitterFacebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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