The national economic shutdown in response to the COVID-19 virus was quick and impactful. Those first weeks were, for some, like an early vacation as we all tried to wrap our heads around what was going on. But after the initial shock set in, many of us began thinking deeper about the long-term effects of what a prolonged shutdown might lead to. Many were laid off while others were furloughed. Soon, the question of ‘should I tap into my retirement plan’ began popping up in people’s minds.
So in this week’s post, we will look at 2 important questions on the pandemic and what to do about your retirement plan.
SHOULD YOU STOP CONTRIBUTING?
Due to the impact of business slowing down, or even lost or suspended jobs, many workers have chosen to stop contributing all together to their retirement plans. According to Mass Mutual, it’s estimated 55% of Americans are planning to make changes to their retirement contributions, and of those, 54% plan to decrease their contributions.
But the question that we should be asking ourselves is, “Should I stop contributing to my retirement plan?” Well, that depends on how you answer the following questions.
DO YOU HAVE AN EMERGENCY FUND?
If you don’t have an emergency fund, please read our previous post on What You Need to Know About Saving Money During a Pandemic. There we defined an emergency fund as “a financial airbag that will help pad you from the financial impact of an emergency like the loss of a job or a serious illness. It’s a safety-net that’s in place for a crisis you don’t know is coming.”
It is important that you have a plan for the eventualities that may come from a prolonged income decrease. So before you make plans for what to do with your retirement contributions, you must have this nailed down.
HOW SECURE IS YOUR JOB DURING THE PANDEMIC?
The next question you need to ask yourself before making decisions on what to do with your retirement contributions is ‘how secure is your job?’ In reality, one can’t be too careful when it comes to understanding the financial position of your company (and your role in that company). If you have lost your job, been put on furlough, or had your hours significantly reduced due to the pandemic, then it would be well worth your consideration to pause your retirement contributions for a time—with a view to getting them back on track as soon as you can. You don’t want to risk your future well being because of a current downturn.
SHOULD YOU TAKE AN EARLY DISTRIBUTION?
Lawmakers, foreseeing the likely need, wrote into the CARES Act the ability for retirement fund holders to receive Coronavirus-Related Distributions. These are distributions from an eligible retirement plan that meets the following requirements:
- Total “coronavirus-related distributions” for the employee’s taxable year does not exceed $100,000,
- It is received between January 1 and December 31, 2020,
- It is made to a ‘Qualified Individual,’ which is a person who meets any of these descriptions:
- is diagnosed with the virus SARS-COV-2 or COVID-19 by a CDC-approved test,
- has a spouse or dependent who is diagnosed with one of these viruses by a CDC-approved Test,
- experiences adverse financial consequences as a result of any of the following:
- being quarantined,
- being furloughed, laid off, or having work hours reduced due to one of these viruses,
- being unable to work due to lack of child care due to one of these viruses,
- closing or reducing hours of a business owned or operated by the individual due to one of these viruses.
Coronavirus-Related Distributions are helpful in that the usual 10% early withdrawal penalty is waived and you can take out up to the maximum of $100,000 from your retirement fund.
But the question you should be asking yourself is, “Should I take an early distribution?” As with the question of pausing contributions, you want to be as sure as you can be that your future self will agree with your current self as to the wisdom of withdrawing the money from your retirement fund. As Paul wrote the Corinthians, “‘All things are lawful for me,’ but not all things are helpful.” Just because this provision exists in the CARES Act, doesn’t mean that you should avail yourself of it. “You do not know what tomorrow will bring.”
DO YOU NEED HELP DECIDING WHAT TO DO?
We understand that the current climate is quite overwhelming. We’re going through it with you! And our history and training have prepared us for serving you during this time. We value you, and we can bring value to you. If you have questions that need answering regarding your retirement contributions or distributions, we’d love to answer them for you. You can reach out by calling us at (888) 272-7102 or emailing us here. We look forward to helping you!