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Should I Use My Retirement Funds for COVID Relief?

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For many Americans, the economic fallout from the COVID-19 pandemic has been devastating.

Millions have filed for and claimed unemployment benefits. (Consider: Nearly 30 million Americans have claimed unemployment insurance benefits in 2020, compared to 1.6 million over the same period in 2019.) Countless others have turned to a variety of short-term financial assistance programs designed by federal and state governments, as well as local credit unions (including SELCO) and banks.

As an additional relief option, Congress created relaxed rules for retirement plans to ease COVID-related income loss as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) passed in March. If you have experienced financial hardship because of COVID-19, you may qualify for a penalty-free Coronavirus-Related Distribution (CRD) from your retirement plan (such as 401K, 403B, and IRA) during calendar year 2020.

How Does COVID-Related Relief Work?

Normally, when you take out funds from a retirement plan before age 59 1/2, you incur a 10% early-withdrawal penalty and are subject to regular income taxes. With the relaxed rules of the CARES Act, you can cash out 100% of your balance up to $100,000 without the penalty. If you pay the funds back into your account within three years, the withdrawal will be considered a rollover and not be subject to taxes.

If you’re interested in taking advantage of this special distribution, a good first step would be to speak to an Investment Advisor at SELCO Investment & Retirement Services, available through CUSO Financial Services, LP (CFS)*, to determine a path forward that will provide the relief you need now while still letting you reach your long-term goals.

“I can’t stress enough the importance of making an informed long-term decision and understanding all of the ramifications before jumping into something like this,” said Josh Lusby, CFP®, CFS Investment Advisor at SELCO Investment & Retirement Services*. “While you might be fixing a short-term problem, you might also be creating a future one.”

Is This the Best Option for Me?

Your retirement plan is a long game, designed to have a steady stream of money going in, not out—and to grow exponentially. Withdrawing a large amount from your plan early could have adverse effects down the road. It likely would take years to replenish your balance, you’d lose substantial long-term growth, and the tax hit could be significant if you’re unable to pay everything back within three years. (This handy 401K calculator will give you an idea how long it takes to build up retirement savings.)

Should you choose to leave your retirement account alone, there are a few alternatives to the Coronavirus-Related Distribution, including:

  • Pausing retirement contributions and redirecting those funds toward more immediate needs.
  • Deferring payments through December 31, 2020, on an existing loan against your 401K to build a savings cushion.
  • Rolling over your 401K funds into an IRA. If you’ve been separated from your job for any reason, you can move your retirement assets into an IRA without penalty.

Navigating a unique situation such as this is a delicate balancing act—carefully weighing your short-term needs while ensuring you stay on track with your long-term goals. Again, your financial advisor can help guide you through the process.

“This is where we can help,” Lusby said. “It’s all about assessing your individual circumstances and making a recommendation that fits those needs.”

*Nondeposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer (Member FINRA/ SIPC) and SEC Registered Investment Advisor. Nondeposit investment products offered through CFS are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. SELCO Community Credit Union has contracted with CFS to make nondeposit investment products and services available to credit union members.

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