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How the Federal Stimulus Package Helps Homeowners and Retirees

As unemployment surges during the coronavirus (COVID-19) pandemic, many families are struggling to keep up with the mortgage and other bills. The recent Coronavirus Aid, Relief, and Economic Security (CARES) Act offers important assistance:

Mortgage relief. If your loan is federally backed, say, by Fannie Mae, Freddie Mac, or the Department of Veterans Affairs, the CARES Act does two things: Puts a 60-day temporary moratorium on foreclosures after March 18; and allows homeowners to receive forbearance, pausing — but not erasing —  loan payments for up to 12 months if they request it.

Don’t have a federally backed mortgage? Contact your loan servicer or state government to explore your options. Some states, including California and New York, have worked with lenders to provide mortgage relief to residents.

RMD reprieve. Many retired investors must take required minimum distributions, or RMDs, from a traditional IRA, 401, 403(b), and 457 plans after age 72 (or 70½ if they were born before July 1, 1949.) The new law waives RMDs for 2020. That’s a good thing: Distributions would have been tied to the size of their account balance at the end of December 2019, when the stock market was much higher than today.

Penalty-free IRA access. Pulling money out of an IRA if you’re years away from retirement should always be a last resort. Selling stocks after they have plunged in value turns what now is only a loss on paper, into a reality.

That said, the new law provides some penalty and tax relief on IRA withdrawals if, say, you or a family member were diagnosed with the virus, laid off or had work hours reduced, or couldn’t work due to lack of child care. Here are the details:

  • During 2020, you can withdraw up to $100,000 from an IRA (or $100,000 total from multiple IRAs) without incurring the usual 10% early withdrawal penalty (if you’re under age 59½).

    Note: If made available by your employer in 457(b), 401(a), 401(k), and 403(b) plans, you may be able to access your vested account balance up to $100,000 across all plans. Employers may set lower withdrawal limits so participants can take assets out of their retirement savings over time to prevent taking more than is needed to cover expenses.
  • Income tax on the distributions can be spread evenly over three years.
  • And to get retirement savings back on track, you can repay what you withdrew within a three-year period — which will be treated as a tax-free rollover.

Note: Don’t overlook other sources of cash before tapping an IRA. For example, you can borrow against the equity in your home using a home equity line of credit (HELOC), at an interest rate that’s lower than credit cards. Or, if you have permanent life insurance, you can withdraw some of the cash value you’ve built up — up to the amount paid in premiums — tax free. (Your death benefit will be reduced).

Other help. Banks and credit card issuers have also announced hardship assistance. (See Roundup: Financial Relief During COVID-19.)

Please note: The contents of this publication provided by ICMA-RC is general information regarding your retirement benefits. It is not intended to provide you with or substitute for specific legal, tax, or investment advice. You may want to consult with your legal, tax, or investment adviser to review your own personal situation. Some of the products, services, or funds detailed in this publication may not be available in your plan. This document contains information obtained from outside sources and it references external websites. While we believe this information to be reliable, we cannot guarantee its complete accuracy. In addition, rules and laws can change frequently.

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