Cash-Strapped From the Coronavirus: Should I Dip Into My Retirement Fund for Relief?

Most of us small business owners are dealing with the impact of COVID-19 on our businesses, our lives, and the national and global economy. Too many small businesses have closed down (hopefully this is only temporary) or altered their business models, creating, among other things, a cash flow problem. Business owners need money—and they need it fast.

Many have turned to their retirement funds to access ready cash. I talked to Kristin Andreski, SVP and General Manager of ADP Retirement Services, about how COVID-19 has impacted the retirement funds of small business owners and their employees.

Rieva Lesonsky: You noticed a growing trend of small business owners dipping into their retirement savings as the pandemic continued to affect us.

Kristin Andreski: Our Service teams did see an increase in inquiries from small business owners to understand their options, for them personally as well as their workforce. Participants are opting for distributions/withdrawals [and not] loans. This may be attributable to participants having concerns that it might be difficult to pay back a loan in the current environment.

In fact, 57% of all in-service withdrawals have been CRDs (coronavirus-related distribution), and 60% of distributions requested were for the maximum amount allowed by the CARES Act.*

[*The CARES Act is the coronavirus stimulus package passed by Congress earlier this year. It allows people who are not yet 59-1/2 years old (the normal rule) to withdraw up to $100,000 from their retirement accounts (IRA, 401(k), etc.) without paying the 10% penalty. This withdrawal is referred to as a “coronavirus-related distribution” or CRD.]

Lesonsky: How widespread do you think it is? Is it nationwide or concentrated in a few regions?

Andreski: The CRDs taken align with the regional location of our clients:

  • 29% were from the Northeast region
  • 28% were from the West region
  • 14% were from the Southeast region
  • 15% were from the Midwest region
  • 12% were from the Southwest region

Lesonsky: Does it seem to be from people who are over 50, or an across-the-board activity?

Andreski: The COVID-19-related distributions by age has been:

  • 25 and younger—3%
  • 26-35—24%
  • 36-45—30%
  • 46-55—29%
  • 55-65—13%
  • 65 and older—1%

Lesonsky: Do we know why this is happening? Is it a “last resort” act?

Andreski: The government took quick action with the CARES Act to provide financial relief to small businesses and their employees who were facing, and continue to face, economic hardships caused by the coronavirus pandemic.

Lesonsky: What advice would you give small business owners or their employees who feel they need to do this?

Andreski: If a small business owner or participant find themselves in a hardship situation due to the coronavirus and need to access their funds, they should do it. That’s the purpose of the legislation—providing relief where needed. It’s always important to consult with a financial, tax, or legal advisor to obtain the guidance relative to the personal situation of the participant or business owner.

However, the CARES Act does allow for withdrawals in advance of employment termination where they may not otherwise have had access to those funds. Plus, the early distribution tax is waived as an additional benefit. And, unlike hardship withdrawals under the current rule, participants can repay the money back to their retirement plans, avoid any income taxes due on repaid amounts and, make up some of the financial ground they may have otherwise lost.

Now more than ever, workplace benefits like retirement plans are critical to protecting workers from further financial stress. Saving for retirement is an investment in one’s future, and repaying the funds withdrawn is a step in the right direction for any financial journey.

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Lesonsky: Are there are tax consequences to withdrawing the money?

Andreski: Coronavirus-related distributions in 2020 do not impose the 20% mandatory withholding and do not incur the 10% early distribution tax that normally applies to withdrawals made prior to age 59-1/2. The income taxes due on the distribution amount are optionally includable over a three-year period. And, the distribution may be repaid to an eligible retirement plan or IRA within three years of taking the distribution.

Lesonsky: When the pandemic ends, is there a way for business owners and their employees to make up for what they took out? Double up on deposits?

Andreski: Repaying the money withdrawn from their retirement plan is the best first step. Not only will that help the business owner and the participants avoid any income taxes due on withdrawn amounts, it will also help them make up some of the financial ground otherwise lost.

Contributing to a retirement plan is an important way to save for the future. Contributing as much as financially possible is a good idea. Working with a financial advisor or financial planner is a great way for participants to determine the best savings strategy for their personal situation.

Withdrawing money from your retirement account may not be the right thing to do for you. Weigh your options carefully, and check with your financial advisor or accountant to review your own situation. And remember, your employees may have questions as well. Make sure you help them get the answers they need.

RELATED: How to Manage a Gap in Your Income During the Coronavirus Crisis

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