Who CARES? by Kurt R. Bachman

As the world wakes from its Coronavirus-induced hibernation, it has to take stock of the situation – both to count and mourn our losses and to assess new opportunities. One important task in both categories is a financial analysis. Many people have used up the cash on hand to simply survive the lack of steady income from jobs. Others have been fortunate enough to survive on the government stimulus projects and unemployment insurance. For many, however, especially those with Coronavirus-related medical bills, the short-term cash inflow hasn’t been enough. People are looking for other avenues, and in response, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, in March to specifically address this issue.

Probably the most important new financial tool is the ability to withdraw up to $100,000 – without the standard 10% penalty for early withdrawal for those under 59.5 years old – from your retirement fund. Only those who qualify can take advantage, but there are two major options. First, either you or a dependent must have been diagnosed with the Coronavirus (typically, the COVID-19 strain). Here, a “dependent” can mean, besides a child, any person whose support is at least 50% covered by you. This means that if you are the primary supporter of an aged parent, you may be able to tap into your retirement fund or theirs. The second qualifying option is if you have suffered “adverse financial consequences” because of being furloughed, laid off, forced to close a business, or obligated to stay home to take care of your child. Most retirement funds qualify, and a quick check with your fund manager can confirm. Please note that you must act before December 31 to avoid the early age-related withdrawal penalty. Standard taxes will still apply, but the CARES Act allows up to three years to pay the taxes.

So long as you qualify and successfully withdraw from your retirement account, you can spend the money however you want – no strings attached. One recommendation, however, after taking care of your immediate needs, is to consider paying the rest into a new, tax-free, retirement fund (such as a Roth IRA) up to the maximum permitted contribution amount and to do so for each of the next three years, as the CARES Act now permits.

Instead of having the funds distributed to you directly, the CARES Act also allows you to borrow up to $100,000 (previously it was only $50,000) against the vested balance of your retirement fund. For those who previously borrowed against their funds, payment deadlines and interest are suspended for the rest of the year. This will be an attractive option for those who liked the terms of their retirement plan.

Some readers may, fortunately, find yourselves in the opposite scenario: despite being at retirement age, you’ve enjoyed good health, your financial needs are few, and your retirement fund is sizable. Nevertheless, given the uneven market conditions this year, some people in such circumstances may find that the value of their mutual fund portfolio has dramatically declined temporarily even though it has reasonable chances at a full recovery. If so, the IRS mandate for those 70.5 years or older that you take a required minimum distribution each year could have a disproportionately harsh effect when your portfolio is temporarily down. Since you don’t need the money, you might prefer to have it invested while stocks are low than to be forced to withdraw it now. Again, the CARES Act comes to the rescue to make such withdrawals optional throughout the remainder of this year.

I need to throw in a word of caution as well. The CARES Act is also designed to help businesses keep the lights on, and sometimes the only roadblock between permanently closing the doors or not is the mandatory employee pension payments. The CARES Act allows employers with single-employer retirement funds to completely forgo funding this year, although any missed payments will be due next year with interest. Of course, if the business goes under, it may mean a year less of funding. Other employers will be looking at their options to only pay minimums. If you were relying on such funding amounts in the short-term, you should contact your fund manager and employer to determine realistic expectations.

The presentation of some new options here should not be interpreted as a recommendation one way or another to tap into your retirement funds or not. God only knows how much more important they may be down the road. Most people should consult a financial planner for immediate financial advice. However, please consult with your local elder law attorney if you run into any problems on the CARES Act package, are told that you or your retirement account don’t qualify for CARES Act aid when you believe otherwise, or you need to restructure your most recent Will or Trust according to these new options.