Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, you may be able to take money out of a qualified plan, like a 401(k), or an IRA, with favorable tax consequences. But should you do it? You might view withdrawing money from a retirement account as a last resort.
Background
Among other changes in the CARES Act relating to qualified plans and IRAs, a participant can withdraw up to $100,000 of funds without paying the usual 10% tax penalty on distributions before age 59½. Plus, you can take as long as three years to pay the resulting tax bill, spread out evenly over the three years. If you repay the full amount within three years, you owe no tax.
To qualify for this program, you or your spouse must be diagnosed with COVID-19 or experience adverse financial consequences due to the virus such as being laid off, having work hours reduced or being quarantined or furloughed.
What are the pitfalls?
There are several reasons why you may want to avoid taking money out of your retirement accounts unless it’s an absolute emergency:
You’re diluting your retirement savings. Although the money comes in handy now, you’re chipping away at your nest egg and forfeiting growth. For example, if you withdraw the maximum amount of $100,000 that would have earned 6% annually tax-deferred for ten years, the value would have been $179,000.
It may be bad timing. Experts say it is difficult to time the markets in the current volatile environment. If you sell some holdings right now, you may be locking in losses that would miss the recovery in the next few months or years.
You still owe income tax. Income tax is due unless you replace the full amount within three years. Also, depending on your situation, you could end up paying tax at higher rates than you would in your retirement years.
Better options might exist. Arranging a hardship loan from your 401(k) might be a better alternative for your situation. You avoid the taxable event of the withdrawal and you pay back yourself with interest. Other options include refinancing a mortgage with lower interest rates, taking advantage of payment relief from mortgage, rent or student loan payments or deferred credit card billing.
While it is an option, retirement plan withdrawals are not always the best choice. Think through all scenarios before withdrawing from retirement funds to cover emergency expenses.
Avalanche of new remote workers creates latest playground for hackers
Hackers have found their new playground amid the increased use of video conferencing during the coronavirus pandemic: Zoombombing!
Zoombombing defined
Named for the company Zoom, the unfortunate first high-profile victim of this phenomena, Zoombombing occurs when internet trolls hack video conference meetings and join as uninvited attendees. After infiltrating a meeting, the hackers then have their fun, doing everything from performing harmless pranks to posting sexually explicit content.
Ideas to keep your meetings private
You can protect yourself, your friends and your company while using popular video conferencing tools with these tips.
Monitor meeting attendance. Designate an employee to monitor the attendees of your video conferencing meetings. By assigning a moderator (host), attendees can be removed or dismissed.
Create a waiting room for new attendees. Most conferencing platforms have a feature called a waiting room. When this feature is enabled, each user who connects to your meeting is put in a queue. The meeting host then approves each person waiting in the queue for admission to the meeting.
Turn off screen sharing for everyone but the meeting host. A favorite Zoombomber prank is to hack into a meeting, share their screen and then draw something really funny or inappropriate. Consider only allowing the meeting host to share a screen and to give permissions to others who subsequently want to share a screen.
Password protect your meetings. As a meeting organizer, you can also choose to password-protect your meetings. Don’t forget to distribute the password to all attendees prior to the meeting.
Carefully choose your video conferencing service. With many different companies offering video conferencing services, it can be difficult to find which company features the best security measures. Take the time to do your homework to find the platform that’s right for your business.
The recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act provides individuals and businesses significant financial relief from the financial strain caused by the coronavirus epidemic.
Here is a snapshot of the unemployment benefits section of the bill and how it affects individuals and businesses.
Who qualifies to receive unemployment benefits? In addition to full-time workers who are laid off or furloughed, the Act provides individuals who are not already eligible for state and federal unemployment programs, including self-employed individuals and part-time workers, a set amount of unemployment compensation.
How much will I receive? There are two different components to the new law’s unemployment benefits:
Each worker will receive unemployment benefits based on the state in which they work, and
In addition to their state unemployment benefits, each worker will receive an additional $600 per week from the federal government.
How will benefits for self-employed workers be calculated? Benefits for self-employed workers are calculated based on previous income and are also eligible for up to an additional $600 per week. Part-time workers are also eligible.
How long will the state unemployment payments last? The CARES Act provides eligible workers with an additional 13 weeks of unemployment benefits. Most states already provide 26 weeks of benefits, bringing the total number of weeks that someone is eligible for benefits to 39.
How long will the federal payments of $600 last? The federal payment of $600 per week will continue through July 31, 2020.
How do I apply for unemployment benefits? You must apply for unemployment benefits through your state unemployment office. Most state applications can now be filled out online. Workers who normally don’t qualify for unemployment benefits, such as self-employed individuals, need to monitor their state’s unemployment office website to find out when they can apply, as many states need to update their computer systems to reflect every type of worker who is eligible to collect unemployment benefits under the CARES Act.
What to do now
If you have not already done so, you must file for unemployment with your state as soon as possible. State offices and websites are being slammed, so the sooner you get in the queue the better for you and your loved ones. And remember, these benefits now apply to self-employed and part-time employees.
Coronavirus uncertainty abounds. Thankfully, by monitoring tax changes on your behalf, we can work together to navigate the right path for you and your family. Here is a round-up of tax-related laws and information to help with tax planning for 2020.
Early distribution penalty waived The 10% early distribution penalty on up to $100,000 of retirement withdrawals for coronavirus-related reasons is waived during 2020. New tax rules allow tax liabilities on these distributions to be paid over a three-year period. So if you need the funds, you won’t see your tax bill skyrocket in one year. Even better, you can return these distributions back into your retirement account over a three-year period and not be subject to the annual contribution limits. Action: This could be a great way to handle emergency payments until you receive a stimulus check, unemployment payments, or a pending small business loan.
Required minimum distributions (RMDs) waived for 2020 Required minimum distributions (RMDs) in the year 2020 for various retirement plans is suspended. The corresponding 50% penalty associated with not taking an RMD is also suspended in 2020.Action: Taking out distributions when the market takes a tumble can hurt retirement income for many years. This change allows you to wait to let the value in your retirement account rebound before you withdraw funds.
IRS installment agreement suspension The IRS is suspending payments of all amounts due from April 1 through July 15, 2020. If you do not pay your IRS installment payment during this time your installment agreement will not be in default. Interest will continue to accrue on these installment agreements. Action: Being on the bad side of the IRS is never fun. If you currently have an IRS installment agreement, look to take advantage of this delay.
Offers-in-compromise The IRS will allow you until July 15, 2020 to provide additional requested information for any pending offers-in-compromise (OIC) and will not close out the OIC during this time without your consent. The IRS is also suspending any payments due under an OIC until July 15, 2020.
Enforcement activities suspended? Not so fast…The filing and enforcement of liens and levies will generally be suspended. However, IRS Revenue Officers will continue to pursue high income non-filers and initiate other actions when warranted.
No new audits The IRS will not initiate new audits during this time, but will act to protect the statute of limitations.
Student loan debt is a hot topic and for good reason. Managing the burden that comes during repayment is very difficult. Fortunately, there are ways to get some relief while taking advantage of timely tax breaks at the same time. Here are four ways to help lessen the strain of repaying your student loans.
Deduct your student loan interest. The IRS allows you to deduct up to $2,500 in student loan interest payments on your tax return each year. The great thing about this deduction is you can take it even if you don’t itemize! Each loan provider should issue you a Form 1098-E if you pay over $600 in interest for the year. If you pay less than that, and you don’t receive a Form 1098-E, save your monthly statements as back up for the interest you pay. Even if you are still in school, and you are making interest payments, you are eligible for the deduction.
Exclude cancelled debt as income. In most cases the IRS considers cancelled debt as income. However, the IRS recently announced that students would not have to report cancelled student loans as income in the following situations:
The school closed when you were attending, or shortly after you attended.
The school actions are contradictory to applicable laws.
You are a part of a successful legal settlement against the school.
If you receive a Form 1099-C for cancelled student loan debt, conduct research to determine if one of these exclusions applies to your situation.
Refinance to lower your payments. Are you making two or more different student loan payments every month? Refinancing multiple accounts into one loan can lower your effective interest rate and your monthly payment. You can also lower your monthly payment by taking an existing loan and refinancing over a greater number of years.
Plan for tuition costs. Utilizing student loans to finance your education is a necessity for many people. However, you can cut down on future payments with early savings. For example, parents and grandparents can create 529 college savings plans. And as soon as you start earning income, earmark a portion of every paycheck for college. Grants and scholarships are another way to reduce tuition costs, so start researching early.
College debt can seem daunting. But by combining a long-term plan while taking advantage of tax benefits, the mountain of debt can become a manageable hill.
