Laws triggered by the pandemic have lowered the tax burden on loans and withdrawals from 401 (k) and IRAs, causing some clients to use their retirement accounts while many others escaped the raid.



With an economy devastated by COVID, Americans have avoided using their retirement plans to cover their daily living expenses. Or they did the opposite, conducting mini-raids on their 401 (k) s and IRAs in search of the money they needed.

Data on how the pandemic has impacted retirement eggs since its first appearance in early 2020 is everywhere.

Fidelity Investments is a “always have your hand in hand” category. found that in the first three months of this year, the percentage of workers with outstanding 401 (k) loans fell to 17.5% from 19.7% in the same period in 2020 when the pandemic began. Only 1.6% of 401 (k) depositors took out a new loan – the same as in the fourth quarter of 2020 and below 2.4% compared to last year’s level. Fewer workers laid off by 401 (k), including due to difficulties, for the quarter – 2.4%, well below 6.1% in the last quarter of 2020 and 3% a year ago. The amounts were small: the average distribution of those in need was $ 3,900, and the average amount was $ 1,000.

Some Americans borrowed from their retirement accounts or cashed in money to cover living expenses during the pandemic.

Some Americans borrowed from their retirement accounts or cashed out money to cover living expenses during the pandemic.

Bloomberg News

In the category of raiding December 2020 Kiplinger’s review found that roughly one in three older American workers either rented or borrowed money from their 401 (k) s or IRAs to take advantage of temporary tax breaks. Among these people, 27% have borrowed from their retirement accounts and 31% have withdrawn money from their retirement accounts.

In the intermediate category is the main financial group, a major provider and custodian of retirement plans, found that, due to the hardships and natural disasters associated with COVID, in the first three months of this year, decreased by 30% compared to last year. But the exported amounts increased by 20%. Loan requests fell 25%, but borrowers asked 12% more.

Among the plethora of statistics, here are what consultants who work with clients who have used their retirement savings need to know:
Last year, federal legislation eased tax restrictions on withdrawals and borrowing from retirement plans. IN Care law, passed in March 2020, temporarily doubled the amount individuals can borrow from their 401 (k) s to $ 100,000 when used to address COVID-related issues. With regard to loans and withdrawals in difficult conditions, the law also abolished the 10% penalty for early withdrawals from persons under 59.5 years of age. Individuals were required to withdraw funds, if their plans allow them, by September 23, 2020. As for loans, it is also eliminated the usual taxes due if the borrowed money is returned to the accounts within three years.

The law also refused Required minimum deductions (RMDs) from deferred tax retirement accounts, including regular 401 (k) s and traditional IRAs, for the previous year and 2019 if the latter were accepted before April 1, 2020.

COVID also changed the rules for legacy IRAs. In December 2019, another law, the Security Law, stipulated that non-spouse beneficiaries must empty inherited accounts within 10 years. The problem is that if they are still at their peak, giving them up – annually or in one fell swoop – can lead to an increase in personal tax bills and push them into a higher tax tier. The law also raised age, to 72 from 70½, at which point holders of traditional retirement plans must receive their first RMD.

Like its predecessor, being older is a tough stop: not using RMD can leave you on your toes. tax penalty of 50% of the amount to be withdrawn. Confusing many advisors, IRS clarified last month that unmarried IRA heirs are not required to receive annual RMDs, but can instead cash them out at any time during the 10-year window.

In general, COVID has created incentives to use pension funds, but it has also created reasons not to. Three government incentive checks have been added to bank accounts. Cash payments occurred as Americans cut spending and accumulated cash at record rates. Americans’ personal savings rate, which represents income after taxes and expenses, skyrocketed to 33% in April 2020, a record high according to the Bureau of Economic Analysis. Now back to slightly less than 15%.

Withdrawing money from pension funds is usually seen by consultants as a last resort. This is because it reduces the heap from which the return on investment can grow over time. At the same time, the strong stock market has muted some of that long-term pain for clients who did get some money out.

Here’s what some experts and advisors see and recommend (edited for clarity):

Rene Schaaf, President of Pension Decisions and Income, Director:
“Of the Principal’s pool of contributors, about 6% of people in plans with available coronavirus-related distributions opted out, with the average request being slightly below $ 17,000. The good news is that we are seeing positive signs that participants are returning to long-term savings. We also see the positive side of the impact of COVID-19 on people’s approach to retirement planning. Our recent survey shows that 27% of workers set financial goals based on projected retirement costs, up from 13% in 2018. ”

Howard Hook, CFP and CPA with EKS Associates, RIA in Princeton, NJ with over $ 218 million in client assets at the end of last year: “For clients who would otherwise have had to obtain RMD from an IRA or 401k, we recommended not accepting an allocation unless they needed funds or had another more efficient tax point of view is the place to receive funds. In addition to paying a lower tax, this was an added benefit to Medicare customers because lower taxable income in many cases resulted in lower Medicare Part B premiums (premiums based on income). A decrease in taxable profit in 2020 will result in a reduction in Part B premiums in 2022. ” With the new 10-year IRA rule known as the extended IRA waiver, “a lot of people are faced with questions about whether to withdraw withdrawals every year, or wait until the last year, or how much to borrow each year. There are tax implications. “

CFP and CFA Clark Kendall, President and CEO Kendall Capital Management, RIA in Rockville, Maryland, which serves what is called “middle class millionaires, “With investment assets of at least $ 500,000:” I have not seen clients take money to make a living. For clients who really needed funds, we used other options such as a taxable (eg brokerage) account. We are also talking about the advantages of a home equity line or margin loan over a stock portfolio. The last thing we recommended is to take a loan from 401 (k). I consider ending the “stretched” IRA as an opportunity. You can postpone the withdrawal of funds. People thinking about retirement in the next 10 years can wait until they receive their money. If you do this after retirement, but before social security starts operating, this could be a great opportunity. ”


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