Running scared in December? Fearful that the latest job cuts at the restaurant or casino where you work could leave you unable to pay your bills?
Or did you or your spouse get sick or end up in the hospital after testing positive for coronavirus in 2020?
As much as we’re trying to hold onto every shred of hope here, the economic outlook for many families remains rocky.
Michigan, for example, resumed some COVID-19 restrictions and initiated a three-week ban in November on indoor bars, restaurants, casinos and movie theaters.
So it might be a good time for some who were devastated by loss in 2020 to cover some big bills and make a few moves by Dec. 30.
The piggy bank of last resort — your retirement savings — could present an option for getting more cash in 2020 even if you’re in your 30s or 40s.
Typically, outside of a pandemic, most retirement experts aren’t going to advise you to tap into a long-term savings plan to handle an emergency. But we’re looking at a true financial crisis for many families here.
Most times, you’d be better off drastically cutting expenses, digging into a savings or brokerage account, or even borrowing a bit more on your credit card with plans to pay it back relatively soon when you’re in the middle of a financial emergency.
For some families, 2020 proved to be an emergency unlike any other and it lasted much longer than many originally imagined.
About 43% of consumers with emergency savings have used that money during the coronavirus crisis, according to a survey released by MagnifyMoney.com, which offers comparison shopping for financial products and is owned by LendingTree.
The number jumps to 64% for those who were laid off or furloughed.
And 54% of those with emergency money took debt rather than tap into their savings. Many said they were reluctant to spend down their savings after it took a long time to build a nest egg.
Many people might not have savings on the side, but they might have been saving automatically on the job through a 401(k) plan.
The Coronavirus Aid, Relief, and Economic Security Act makes it easier to avoid penalties and spread out the taxes associated with withdrawals from retirement savings if you qualify. The money would have to be taken out of retirement savings from Jan. 1, 2020, to Dec. 30, 2020.
For example, you’d avoid the possible 10% early withdrawal penalty if you’re younger than age 59½ and qualify for a coronavirus-related withdrawal.
In addition, the regular taxes owed could be spread out over three years.
But again, you need to know and follow the rules.
How much money can you withdraw?
People directly affected by COVID-19 — through a health issue, job loss or cut in wages — are able in 2020 to withdraw up to $100,000 from 401(k)s and 403(b)s, as well as traditional individual retirement accounts.
The $100,000 maximum is the cumulative limit. So you can’t withdraw $200,000 from a few accounts, say if you have a 401(k) and an IRA with plenty of money, and expect the entire amount to get favorable treatment.
About 1.4 million people — or 5.7% of the participants in 401(k) and 403(b) plans administered by Fidelity Investments — took advantage of these types of withdrawals through Nov. 30. Those numbers do not include withdrawals from IRAs.
The average amount withdrawn is $9,600 per transaction. But what Fidelity found is that some people took out money more than once, as the pandemic and jobs picture didn’t improve in a few months as some had initially been led to believe.
The average amount for workers who took only one withdrawal was $19,700. And about 61.2% of workers withdrew money only once.
About 18.8% of workers took money out twice, adding up to an average $20,800. Others, though, did make three to five withdrawals, often in smaller amounts.
Workers at manufacturing companies withdrew a good chunk of that money or made 25% of the withdrawals. Health care workers made 17% of the withdrawals, according to Fidelity.
Employees in those two industries often do not have an option to work from home, and as a result some may have faced more exposure to the virus, according to Eliza Badeau, Fidelity vice president of workplace thought leadership.
In addition, Badeau said, workers in these industries were susceptible to being furloughed or laid off, which may have contributed to the need for extra money, too.
Everyone isn’t getting special treatment here. To qualify, you must meet some specific requirements as spelled out by the Internal Revenue Service.
The IRS notes this special rule regarding taking money out of retirement savings early can apply if, among other things:
You, your spouse or a dependent are diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention. You suffer a financial setback as a result of “being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19.” (Retirement experts note: If your spouse is laid off but you’re still working, you can’t use your spouse’s layoff as a reason to take a CARES Act withdrawal from your 401(k). You experience adverse financial consequences because you were unable to work because of lack of child care due to COVID-19. The business that you own or operate had to close or reduce hours because of the virus.
Many people won’t avoid taxes entirely on these COVID-19-related withdrawals from retirement savings, such as 401(k)s, 403(b) plans, and IRAs. But they can spread out the taxes owed and, possibly, avoid a chunk of taxes.
You should talk with your tax professional to see how best to manage the tax hit.
“For example,” the IRS states, “if you receive a $9,000 coronavirus-related distribution in 2020, you would report $3,000 in income on your federal income tax return for each of 2020, 2021, and 2022. However, you have the option of including the entire distribution in your income for the year of the distribution.”
It is possible to repay the money back into your retirement savings plan in 2020, 2021 or 2022 and avoid income taxes as part of the coronavirus relief effort. You may need to file an amended return to avoid income taxes, depending on when you repay the money taken out in 2020.
If your financial situation improves next year, it could be wise to put money back into retirement savings to help you save for the long haul.
How many people will have enough money — or willingness — to pay back the money withdrawn could be another story. Unlike a loan from a 401(k), the money would not be required to be paid back into the retirement savings plan under the CARES Act rules.
Do you have a plan to get back on track?
Many people in their 30s and 40s who withdrew money in 2020 could get back on track by simply boosting their retirement savings by 1% for each paycheck going forward, according to Brian Alling, head of advanced analytics for Vanguard’s Strategic Retirement Consulting team.
The 1% estimate is based on the typical participant who took a withdrawal. According to Vanguard’s data, the median age of an employee who took a CARES Act withdrawal was 43 and the media income was about $62,000.
The median amount withdrawn from Vanguard plans as part of a CARES Act-related distribution was approximately $12,800 and the average was $23,900 based on data through Nov. 30.
Someone who withdrew $12,000 or so, Alling said, might have a much easier time getting back on track by consistently saving a bit more money over the long run. Workers who are in their 50s and 60s and closer to retirement, though, may need to save more to get back on track. For older workers, much would depend on the amount they’ve already saved.
Vanguard noted that through Nov. 30 about 5.3% of its participants withdrew money from their retirement plan through a CARES Act-related distribution. That’s up from 4.5% of the participants as of the end of September.
Overall, retirement savers have stayed the course, Alling said, especially if they had most of their money in target date mutual funds that offer a mix of stocks and bonds based on your planned retirement date.
Vanguard said its Target Retirement Fund investors are five times less likely to trade, even amid acute economic and market stress.
Could this be a last-minute option in December?
The clock is ticking, as we move closer to the deadline for completing this transaction by Dec. 30. So you’d need to move pretty quickly here.
Contact your plan provider to find out what type of paperwork might be required by your specific plan. Some plans, for example, might require you to get approval from your spouse before making such a move, says Fidelity’s Badeau.
She said it could take longer to process such a request if you have employer stock that you’re going to sell in the plan. But the time frame could be shorter if you had mutual funds in the plan.
Again, it’s not a move one wants to make on a whim.
“If they had an emergency fund, we would recommend using that first,” Badeau said.