WFA April 2020 Newsletter

 |  Willamette Financial Advisors, LLC

Answers to important questions you may have about the CARES Act and your Investments

Can I take money from my IRA to cope with the economic slowdown?

Yes. The CARES Act waives the 10% early withdrawal penalty. You can withdraw up to $100,000 from your IRA and not be penalized. You You will still owe income tax at your ordinary income tax bracket on the amount you withdraw. Conditions for withdraw without penalty: This provision is for people who have been affected by the COVID-19. Either you’ve gotten sick, or your spouse has, or one of you has lost your job, or your business has been impacted. This will apply to pretty much everyone, to varying degrees. Save documentation so you can verify the use of the funds withdrawn.

Can I put the money back into my account to avoid paying income tax on funds I don't use?

Yes! For example, let's say you fall into the 22% tax bracket. You will owe 22% on the amount you’ve withdrawn (e.g., $22,000 on a $100,000 withdrawal). You have three years to pay the taxes the withdrawal. You can split the taxes owed equally between 2020, 2021 and 2022. Alternatively, you can return cash to your IRA from this early withdrawal whenever you want over the next three years to avoid owing the taxes pro-rata.

Do 401(k)’s get the same treatment as withdrawing from my IRA?

Not exactly. In order to take money from a 401(k), 403(b) or 457(b), it’s either a distribution or a loan against those assets. The CARES Act expanded the size of the loan you can take from your 401(k) or similar retirement plan and raised the borrowing limit from $50,000 to $100,000. The 10% penalty has been waived, just like for IRA owners. If you choose to take a distribution from a 401(k), you also have three years to repay the loan, minimizing each year.

Can I borrow from my IRA instead of taking a withdrawal?

Unfortunately, no. You cannot take a loan against your IRA and use those assets as collateral. This would be seen as a “non-qualified distribution” in the eyes of the IRS. Don’t even attempt it.

Can I freeze my Required Minimum Distributions (RMD), if I don’t want to sell stocks down 30% from their highs?

Yes! Investors over the age of 72 have been given a waiver to halt RMDs through 2020. You can postpone taking money out of an IRA (or other qualified plan account) until next year.

What about postponing RMDs from Beneficiary IRAs?

We’ve had clients ask us whether or not the waiver includes beneficial IRAs that have been inherited. We’re still waiting for definitive guidance from the IRA. We recommend that clients hold off before taking these distributions. If you have already taken your RMD, you may be able to just roll that amount back into your IRA. Talk with a tax professional or financial advisor first. We will continue to monitor this issue and provide updates as they become available.

If you have bills coming in with no way to pay them, using an early withdrawal from your IRA is smart, provided you have a plan to return those funds to the account as soon as possible to avoid owing the taxes on the withdrawal. This one-time waiver of the 10% penalty makes it less painful to do.

If the value of your retirement account has fallen and you do not want to sell your stocks to take required minimum distributions, the provisions in the CARES Act provide some relief. Hopefully things will have recovered in time for your 2021 RMD.

COVID-19: Interview with Dr. Fauci

Here's a link to a worthwhile interview with Dr. Fouci. It provides sound, data and science-based information.

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