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The CARES Act Retirement Account Withdrawal Rules: Should You Take Money Out?

This has been a year like no other.

A pandemic has engulfed the world. Unemployment rates in the United States have jumped to the highest they’ve been since the Great Depression.

The United States government recently passed the CARES Act, which offers many financial breaks to Americans including a stimulus check and a hiatus on student loan payments for six months.

It also offers Americans the chance to take money out of their retirement account with fewer penalties than normal.

But just because you can, should you take money out of your retirement under the CARES Act?

What Are The CARES Act Retirement Account Withdrawal Rules?

If you choose to take money out of your retirement under the CARES Act, there are a few details you should know.

Have You Been Affected By COVID-19?

To be eligible to withdraw money from retirement under the CARES Act, you must have been affected by COVID-19 in some way, whether that be you or an immediate family member being diagnosed with COVID-19 or having experienced a lay off or reduction in hours because of the pandemic.

No 10% Penalty

When you withdraw money from your retirement account, you must pay a 10% penalty if you’re under 59.5 years old. The CARES Act eliminates this penalty.

Flexibility With Paying Taxes

In ordinary times, when you withdraw money from retirement, you have to claim that money on your next tax return. However, under the CARES Act, you have up to three years to claim the money on your tax return. That means if you withdraw $24,000, you can claim $8,000 on your tax return for each of the next three years.

Flexibility To Redeposit Money

Normally, when you withdraw money, you need to pay it back within 60 days if you don’t want to claim it on your taxes. However, under the CARES Act, you have up to three years to pay back the money and thus not face a tax penalty.

The Withdrawal Amount

Any person is allowed to withdraw up to $100,000 from their retirement account(s). This is per person, not per account.

This Year Only

All of the rules stated above apply only to this year. Next year, unless the government intercedes, the rules for pulling money from your retirement account go back to normal.

Should You Withdraw Money?

The question is, should you take money out of your retirement account under the CARES Act? This is a difficult and personal decision to make.

Drawbacks To Taking Out Money

Obviously, if you take money out, you lose the ability to earn interest on that money and further grow your retirement savings. For that reason alone, you should think carefully about withdrawing money because you may be irreparably harming your financial future.

Also, although you don’t have to pay a penalty for taking money out in these circumstances, you do have to pay taxes. Depending on the amount you take out and your income bracket, the tax bill could be large. This may be a hardship to pay at tax time.

Why You Should Take Money Out

If you’ve been financially hit by the pandemic and have utilized all options to help you make ends meet and are still struggling, then you may want to consider taking money out of your retirement. If you do take the money out, make sure to take out the minimum you need, so you do the least damage possible.

Second, remember that these special rules are only in effect for this year, so if your hours have been reduced and you think they may be reduced further next year, you may want to take money out at the end of this year. If you have the discipline, you can keep the money in savings. If you don’t need it, simply pay it back.

Withdraw From Your Retirement Accounts, But Only If You Need To

This pandemic has affected people from all walks of life in a variety of ways. If you’ve been directly impacted by COVID-19, you do have the ability to take money out of your retirement account penalty free and with more flexibility than at any other time. However, only take this option if you have to.

Saving For Retirement: Planning Your Monthly Income

By Miranda Marquit 2 Comments

There are a number of rules of thumb associated with saving up for retirement.

Most of them, though, focus on amassing a nest egg.

This nest egg should be big enough that when you withdraw about 4% a year, it should be earning a return that allows you to meet your yearly expenses (when combined with your Social Security income, of course).

Another thing you can do, though, is save for retirement focusing on creating income streams that provide for your monthly needs.

Determining Your Monthly Requirements

The first thing you will need to do is determine your monthly expenses in retirement.

For most people, this requires estimating what will be spent during retirement. You can base your monthly expenses on what you spend now, though. Perhaps you will have your mortgage paid off by then, or your other debts paid off. Many choose to determine that these amounts will still be spent — but on something else (such as travel or a hobby).

Once you know your monthly requirements, you can factor in your income from a retirement account and from Social Security. Be careful, though: Social Security benefits may be reduced in the future, and you never know what will happen with retirement investments. Retirement calculators can help you figure out how much of your income you should be setting aside to reach a certain goal. Many “regular folks”, though, understand that they might not be able to amass a huge nest egg in time to retire. The good news is that you don't have to create a huge nest egg if you instead focus on developing different income streams.

Cultivating Income Streams For Retirement

Once you know approximately what your monthly income needs will be in retirement, you can start looking for ways to cultivate income streams for retirement. Relying on once source of income to meet your needs can present problems down the road. If that source of income fails, then you may find that you are unable to meet your needs at all. Starting to develop different income streams now can benefit you in the future.

There are a number of things you can do now to build a foundation of passive income that can last during retirement. Plus, you can use the money you earn now to build a nest egg. Some possible items include:

Royalties: When you create something, you can generate regular income. Selling ebooks, or music, or writing a book can be a way to generate income. Look for ways to use your creativity.
Business: Start a business. You will build up revenue, and after a while you can continue to earn money. Even if you turn the business over to someone else to run after you retire, there are still ways to ensure that you receive a revenue stream from the business.
Rental Property: If you can deal the inconveniences of renting, and if you can buy a rental property, it can be one way to prepare for the future. Start now, and the rent paid by tenants will pay off the mortgage. Hopefully, by the time you are ready to retire, the mortgage on the property will be paid off and you can receive an income stream from that.
Web Sites: These days, you can earn income from a web site. Affiliate programs and ads provide you a way to earn a regular income indefinitely, as long as you take the time to set it up now, and maintain it.

There are other options as well, including freelance work and part time work. With some planning, you can diversify your income so that it meets your retirement needs — without a massive nest egg.

Do you have other suggestions for creating ongoing income that you can use in retirement. Tell us your ideas in the comments!

How To Stop Feeling Pessimistic About Retirement

By Miranda Marquit 3 Comments

When many Americans think about retirement, they are pessimistic — and for good reason. According to a recent COUNTRY Financial Security Index survey, 25 percent of Americans say that they are not saving for retirement at all. If you aren't saving toward your retirement, it's hard to be optimistic about it.

Additionally, there is a great deal of pessimism among people in my own age group (age 30 to 39) about the ability to have a comfortable retirement. In fact, 47 percent of adults in my age group think that it's impossible for a middle-income family to save for a secure retirement.

When you look to those 40 and older, 47 percent of them regret that they didn't start saving for retirement earlier, reports COUNTRY.

stop-feeling-pessimistic-ab

However, you don't have to feel pessimistic about retirement, especially if you are in my age group or younger. Take action now, and you can start to feel better about your chances for a comfortable retirement.

Plan a Retirement Needs Assessment

Much of the time, people are pessimistic because they don't actually know what they will need in retirement. Take the time to sit down and estimate what you will need. That will give you a starting point.

Then, break it down. If you look at the final number, chances are that you will be discouraged by the amount you will have to save. Instead, look at things in terms of monthly income, and in terms of what you can set aside each month for the future. Open an account at a brokerage like Betterment, and you can also get a projection of what your current savings plan will yield you by your retirement age. I began feeling better about my own retirement when I looked at the projection. Compound interest is more powerful than you think, and running a calculation that can help you prepare for your needs can be a great way to move forward.

Start Investing for Retirement RIGHT NOW

Another way to feel better about your situation is to take action. You can start investing for retirement right now. Betterment is a great place to start. If you can put in $100 a month, you can get started with an IRA that will help you invest better for the future. One of the great things about Betterment is that it keeps you on track, and helps you stay in automatically.

But you don't have to start there if you don't want to. You can also start by contributing to your employer's 401(k) plan. Have the money taken out of your paycheck. At the very least, open an account at a discount brokerage with $25 and make regular contributions to purchase shares of an index fund. Anything is better than nothing when you plan for the long-term. Over time, as your financial circumstance change, add more to your regular retirement account contributions. But getting started now will help you overcome some of your fears about retirement.

One of the worst things you can do is nothing. Take action and start investing for retirement today. You'll feel better, and you'll be motivated to make a plan to better secure your financial future.

Retirement Finances: Will Your Expenses Drop? Or Just Change?

By Miranda Marquit 5 Comments

One of the rules of thumb that has been in existence for a long time, particularly associated with retirement, is the idea that you should plan to need around 75% of your current income in retirement.

This rule has always bugged me. How many of us really expect our expenses to go down in retirement? I always assumed that my expenses in retirement would be about the same — or even rise.

Spending on Different Things

will expenses decrease in retirement When it comes to the old rule of thumb associated with retirement costs, many people cite the fact that homes are likely to be paid off. Debt will be gone (although this is an increasingly unlikely scenario for many people). And since you aren't driving to work every day, the costs associated with transportation, keeping up a professional wardrobe, and spending on lunch and other items are supposed to go down.

While all of this might be true, does it mean that you won't have other spending priorities in retirement? My guess is that you will probably just spend on different things. Perhaps you may no longer have a house payment, but what if you decide to travel during retirement? You may not need to spend on gas to get you to and from work, but you may have a new hobby that costs just as much as your old transportation costs — or maybe even costs more.

The point of the modern retirement is that you have the chance to spend money on things that interest you. The modern retirement (if it can even be called a true retirement) isn't about sitting around on your porch all day, doing nothing. It's about experiencing the things you couldn't do while you held a full-time job. It's about trying new things — and that can take money in many cases. Rather than assuming that you will be able to make it work on 75% of your current income, it can make sense to assume that you will need just as much money, but that you will spend it on different things.

Longevity and Needing More Money

In fact, it might make sense to assume that you will need more money in retirement than you need now. One of the big reasons for that is the fact that we are living longer as humans, and that comes with a host of costs — particularly health care costs. Health care costs continue to rise, and they will probably rise during your retirement. And with people living longer than ever, there is a good chance that you will need some sort of long-term care at some point.

When you start to think about it, it makes sense to plan for higher costs in retirement, rather than planning to spend less. Consider long term care possibilities, and ways to protect your assets (perhaps with long term care insurance). That way, you will have a better chance of keeping up with your desired quality of life during retirement.

What do you think? Do you think it's dangerous to assume that you will only need 75% of your current income during retirement?

The Best Retirement Might Be…Not Retiring

By Miranda Marquit 5 Comments

Many of us talk about retirement as the reward for decades of hard work. After working so hard for so long, the reward is supposed to be the ability sit around and do nothing — whether it's in the house you've lived in for 20 years or whether it's on a beach somewhere — until you die or a nursing home becomes necessary.

However, the “dream of doing nothing” that Office Space character Peter Gibbons has might not be the ideal retirement after all. Instead, you might be better off working than retreating to your haven and spending the days sitting on your front porch or puttering around in the garden.

According to a recent study by a British think tank, it turns out that you are likely to live longer, and even have a better quality of life, if you keep working in retirement. Without a reason to get in the morning, it seems as though retirement is more of a curse than a blessing. While some of that probably has to do with how much money you need to retire comfortably, it also has to do with the fact that retirement can mean an end to your social life, and even reduce the amount of physical activity you engage in.

working in retirement Quitting might not be the answer if you want a good quality of life during your senior years.

Does That Mean You Have to Stay in a Job You Hate?

Of course, that doesn't mean that you should just stick through with a job that you hate. Other studies indicate that staying in a job you hate is also bad for your health.

Retirement doesn't have to be an all-or-nothing proposition. Instead, consider doing something you love in retirement. You can keep working in retirement, doing something you enjoy.

One of the great things about careful retirement planning is that it gives you the chance to earn enough financial freedom to do the job you want, rather than have to work for survival. If you want good health in retirement, the key is doing something that you enjoy, and that you feel is useful. Do something that will get you out of the house, as well as promote some kind of social interaction and mental challenge.

To me, retirement isn't going to be about suddenly stopping everything and just hanging out. I'll probably write while I'm retired, since this is a career I enjoy. But I'll also (hopefully) have enough saved up that I can enjoy other activities, such as travel and volunteering. Plus, I'll be able to work on writing projects that I'm most interested in, rather than having to take on certain projects just to pay the bills.

Ultimately, working in retirement should be about choice, rather than the need to keep working in order to pay the bills. And no retirement is likely to be a long term success if your quality of life deteriorates soon after you quit your job. Figure out what you will do in retirement, as well as how much money you'll need. A successful retirement involves the emotional and mental aspects, as well as the physical and the financial.

Tax Issues to Consider During Retirement

By Miranda Marquit Leave a Comment

When most of us plan for retirement, we think ahead to how we will generate the income needed to sustain our desired lifestyle. We add up costs, and try to determine if we are saving enough each month for a nest egg that meets our needs.

However, many of us forget that it's important to consider the cost of taxes. Your tax situation can have a big impact on whether or not you ultimately reach your retirement goals.

Here are some of the tax situations that can affect your tax bracket, and affect your overall wealth:

Distributions = Taxable Income

Unless you have a Roth account, your retirement account withdrawals count as taxable income. Depending on how much you withdraw each year, you could see an increase in what you owe. Your distributions could put you in a higher tax bracket.
Tax Issues In Retirement
If you have relatively modest retirement needs, then this usually isn't a huge problem. Modest living can mean that you end up in a lower tax bracket during retirement. However, if you are still meeting debt obligations, and if you are pursuing expensive hobbies or travel, you might need to withdraw more money in order to meet your requirements. This means higher taxes, especially if you continue to work during retirement on top of withdrawing money from your account.

Required Minimum Distributions

Maybe you don't necessarily need to withdraw a lot of money from your retirement account. Once you reach the age of 70 1/2, though, what you require during retirement might not matter so much. You have to take required minimum distributions (RMDs) from every retirement account except a Roth IRA.

These RMDs are figured based on your life expectancy and the size of your nest egg. If you don't take the required amount each year, you are hit with penalties. However, taking the RMDs can lead to putting you in a higher tax bracket.

Rolling Your Retirement Account To A Roth IRA

Almost all of these tax issues can be solved by rolling your qualified retirement account over to a Roth IRA. You don't pay income tax on your Roth IRA withdrawals, and you aren't forced to take RMDs with a Roth IRA.

However, rolling over your retirement account comes with its own tax consequences. While anyone, at any income level, can roll over a qualified account, there are still tax hits. First of all, if you have your money in a deferred account, you haven't paid taxes on your contributions, so you will have to remedy that situation. The IRS will consider the amount you roll over as income, and you will be taxed at your marginal rate.

You can roll all of the money over at once, and pay the taxes to get it over with, or you can roll over a portion of your retirement account a little at a time to spread out the tax impact. Before making the decision, consult a knowledgeable financial professional about the tax implications. You should work out a plan that helps you minimize your taxes in retirement.

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