Pilfering Your Pension During the Pandemic

TIMES are unusual for certain, and many of us are concerned about our monthly cash flow – incomes may have dried up, but outgoings have not. But if we do not want to run up credit card debt to pay for our utilities, where else may we get our hands on some accessible cash? Many of us have savings in our retirement accounts – 401k or IRA accounts – and there are ways to access this money.

Usually, this can come with a sharp slap across the wrists from Uncle Sam in the form of a tax penalty – after all, he wants us to save for our futures and it should go without saying, so do we. This alone is usually enough of a disincentive for most of us to only think about doing if we really do need the money and cannot find a better way to access it – after all, depending on how your accounts are set up, you are looking at a 10 per cent penalty tax on top of whatever income tax you owe on the withdrawal. If you are under 59-and-a-half, that is.

But, as times are unprecedented right now, Uncle Sam is being a bit more lenient than usual on borrowing from your future self. Part of the CARES Act lets people get at their money if they were affected by the coronavirus and need the money now rather than later. Right now, individuals can withdraw up to $100,000 – or their account balance if lower – without the tax penalty.

And since it is your money to start with – though supposed to be locked away for your future – it does not have to be repaid. This may seem a great way out of the problem – after all, today’s problems outweigh your future self’s problems do they not? But naturally it is not quite that simple – provisions may not apply to everyone, and it may not be the best idea even if available to you.

What are the conditions for being able to access your retirement money today? As well as the $100,000 cap, across all accounts aggregated, you or your spouse or a dependent must have either been diagnosed with coronavirus or financially impacted by the pandemic. This does include parents unable to work because of childcare problems.

Any withdrawal is still subject to income tax, if your particular setup is pre-tax, but you can spread it over three years. And if you do repay yourself within the next three years, you can claim that tax paid back again – and there will be no 10 percent hit. There are no conditions on spending the money.

But there are catches – if your retirement money is inside a company held account, the company decides whether it is allowing the withdrawal. You would need to check with your company’s plan to see if it is participating. But all that said, should you borrow from your retirement and your future self? It really depends on your individual circumstances.

A loan may be better than a withdrawal if your scheme allows them – you will be forced to repay yourself, which is no bad thing as you will need that money in the future.   If you have an old 401k from a previous job, you may be better rolling it over into an IRA – remember taking from your retirement now is going to have a big impact on your quality of life in the future.

Consider your other financial tools – home equity loans may offer a low interest solution, but the money will be repayable and will be attached to your property if you do not.

Credit cards can work as a very short-term solution, and you can get a good interest free period – but if you do not pay back in full, the interest will mount very quickly at a high rate and you will ding your credit score.

Are you saving elsewhere? It may be better to pause those goals and free up cash now – any mortgage overpayments or 521 schemes for children’s college may give you the cash you need now. Look carefully to cut any other costs and expenditures you can right now.

If you do decide your retirement provides the solution you need today, be as frugal as possible and only take exactly what you need – you are giving up the wonders of compound interest. If you are confident you can – and will – repay yourself then it may be the solution, but it is worth taking advice from your financial professional.