The Two Best Ways to Access Your Retirement Assets

Unprecedented Times Call for Unprecedented Actions

“This time it’s different” are said to be the four most dangerous words on Wall Street. But this time it is different. We haven’t been through a pandemic like this since 1919. So, if your clients need cash, and have no other source, then suspend the golden rule about not spending retirement assets.

KEY POINT: the CARES Act has suspended many of the rules we have abided by, so think beyond the old rules.

The 2 Best Ways To Access Retirement Funds

KEY POINT: under the provisions of the CARES Act, all withdrawals or loans from retirement accounts must not exceed $100,000, or the old rules will apply to every dollar over $100,000.

1. The Best Way: Go to your Roth IRA First

Withdrawals from a Roth are not subject to income tax.

By law, you have already paid income tax on your contributions to a Roth IRA, so you will not be double-taxed.

10% Excise Tax on Early Withdrawals Has Been Suspended

If you are under age 59 ½, the 10% excise tax from the Federal government on early withdrawals has been suspended by the CARES Act. If you are over 59 ½, the 10% excise tax never applied. 

Beginning Tax Year 2021 You Will Have Three Years to Pay Back the Money You Withdrew from Your Roth

Whatever your age, you can pay back the money you withdrew without that money being counted as a contribution. You can pay all of it back or a portion it doesn’t matter.

Beginning in 2021, you will have three years to pay yourself back by depositing money into your account in small amounts or one amount.

    KEY POINT: you cannot borrow money from any type of IRA

2. The Second Best Way To Access Retirement Assets: Arrange A Loan From Your 401(k), 403(b), or 457 Plan.

If your plan allows loans, you can take a loan that is secured by your assets. Borrowing your own money is the second-best way to get cash out of your retirement accounts. Unfortunately, not all plans have this feature.

The CARES Act has raised the amount you can borrow to 100% of your vested account balance but you cannot exceed 100K.

There is no ten percent excise tax on a loan. Remember, in this scenario, you are not making a withdrawal from your plan, you are arranging a loan to yourself of your own money. Don’t confuse the two.

1. You do not report this money as income on your 1040 or pay income tax because it is simply a loan such as you might receive from your bank or credit union.

2. Your plan sponsor will have a series of rules about loans. These are often complex, so you need to contact them. They will also inform you how they will calculate the interest they will charge you.

3. Remember, you are paying the interest to yourself. Hence, a loan to yourself from your plan is the same thing as investing in a short-term bond. You will also receive a reasonable rate of interest on your money without any risk to your principal.

4. Commencing in Year 2021, you will have five years to pay off your loan.

In this unprecedented time, you may have clients with immediate cash needs who don’t wish to take out a home equity loan or run up a large balance on their credit cards. Hence, I trust you will find this information on how to access cash in retirement accounts without penalty or income tax to be of use to you and your clients.

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Contributing Writer: Subject Matter Expert Charles McCain