Over the past few months, I’ve written a few articles about the recent tax law changes, and how they might impact our clients, or people interested in becoming our clients. But I never really dug deep into the tax changes surrounding those who were impacted by the coronavirus—the so-called coronavirus-related withdrawals. Mainly because none of our clients (that I knew of) were actually directly impacted by the coronavirus. In fact, I couldn’t think of a single person that I personally knew who had coronavirus.
Then, on July 27, I received a positive test result. Amidst the flurry of emotions, the one thought that I didn’t really have was, “Are we going to be financially okay?” My family is fortunate, and we’re blessed to be in a financially stable position.
But I realize that not all families impacted by the coronavirus are this lucky. Objectively, I recognize the reason Congress passed legislation like the CARES Act. But for the first time, I tried to put myself in the position of a family where this might be a real consideration. Here are my thoughts.
Thought 1: If you need the money, take it. But you probably need to be pretty sure that you need it.
I’ll lead with the seemingly flip advice. But the rest of this article is going to be spent trying to find ways that you can talk yourself out of it.
Eventually, if you get through the end of this list of excuses, hangups, and come-on’s, and you still need the money, then take it. Without remorse. It is YOUR money, and the government is giving you one pass at taking it.
But let’s get through the list first.
Thought 2: There are tax planning opportunities that have been expanded, but there aren’t really any new ideas. Don’t get fancy.
But while the coronavirus-related legislation allows for more leniency, there’s nothing new for most people. Even the rule that allows people to be taxed on their withdrawals over multiple years, or to put money back—that was designed specifically to provide flexibility to get through today’s tough times, nothing more.
If you try to get fancy or tricky, you’re probably going to make your taxes more difficult than they need to be (putting more money into your accountant’s pocket), and you’re not going to get much benefit from doing so.
Thought 3: If you still have a job, you probably don’t need the money. You need to stop outspending your income.
Truth hurts, and this is a truthful time. Take a look at your finances and recognize that having a job in this economy makes you one of the lucky ones. If you’re even tempted to take money out of your retirement accounts to ‘get ahead’ somehow, you may want to take a serious look at where your money is going.
After all, if you’re feeling ‘tight’ right now while you have a job, and your solution is to take money from your retirement account so that you can kick that can down the road, then what will your answer be when you’re at the end of the road? When you finally feel like you’re ready to retire—will your retirement savings be there? Not if you use it to supplement your life because your paycheck wasn’t enough.
So take a close look at what your money is going to be doing for you when you pull it out.
Thought 4: If you’re looking at your 401(k), recognize that your employer gets a vote.
While the CARES Act permits employers to adopt certain changes to loan rules and distribution rules, it does not force them to. You need to understand what your employer’s plan allows (and doesn’t allow), so you can make the appropriate decision.
For example, you may want to take a loan, with the intention of repaying it next year. While you can take the money out and declare it a coronavirus-related distribution (you can do this regardless of what the employer’s plan says), the employer isn’t forced to treat it as a loan, if the plan normally doesn’t allow for loans, and the plan did not adopt any of the provisions allowed under the CARES Act.
So, before you take money out, be very careful to map out how that money is going to be treated (and taxed), so you make the right decision.
Thought 5: The rules are constantly changing.
At first, you couldn’t replace money taken from an inherited IRA. Then you could—until August 31, 2020. At first, you could only replace one withdrawal that could have been considered a required minimum distribution. Then you could replace everything—until August 31, and then only the required distributions.
Just remember, the rules that might be helping to inform your decision today might be different down the line. So if you’re taking money out with an understanding that you might be able to replace it later on…just know that’s probably not a safe assumption, unless you’ve discussed it with your tax professional or financial advisor.
Thought 6: Don’t be a jerk.
Today, there are tons of stories coming out about people taking advantage of this economic stimulus. Like the guy who used a PPP loan to buy a Lamborghini. Or the people upset that their boss took out a PPP loan to keep them on the payrolls instead of letting them collect unemployment.
And certainly, when this crisis first hit, there was a LOT of financial uncertainty. There were plenty of people wondering, “Am I going to be okay?” But now, we’re a little further along than we were in March. Most people have a pretty good sense of where their finances are.
While Congress did a pretty good job of closing most loopholes, they were also trying to pass a very comprehensive law in a short period of time—they probably missed something. If you’re in the position where you could probably get by simply by buckling down, then don’t try some crazy stuff just to take advantage of loopholes. Jerks do that.
Thought 7: Do you need to talk with someone first?
Before you do something that could have significant tax implications, it’s always a good idea to talk with your tax professional or financial advisor. If you don’t have one, this might be the time to think about whether this would be a good decision.
If you are going to hire a financial planner, the best time to do so is before you make significant decisions. The saying, “An ounce of prevention is better than a pound of the cure” applies here.
The coronavirus has directly impacted millions of Americans. Even though it has impacted my life, I am fortunate enough to see this as a short-term setback. Eventually, I’ll recover with little financial impact, and (hopefully) little in the way of long-term health effects.
For many people, though, the coronavirus has had a much more significant impact, either form a health perspective, a financial one, or both. While the CARES Act has done a great job in loosening some of the restrictions governing your retirement accounts, there are still tax and financial implications to be seriously considered.
Before making a significant financial decision regarding your retirement funds, you should consult your financial or tax advisor. If you don’t have one, or they can’t help you, contact us. We would be more than happy to see how we might be able to serve you.