Take the penalty-free 401k withdrawal that the CARES ACT allows?


hey Dustin tivity a financial adviser

which as wealth managers I got a quick

one for you here today you know a couple

weeks ago the government passed a what's

known as the cares Act and inside of the

cares Act one of the things was taking

money from your 401 K early so let's say

you weren't of retirement age could you

take money from your 401 K penalty-free

and withdraw that money we you know

without paying a penalty and so

basically they just eliminated that and

they said tell you what if you're

falling on hard times here you could

take money early from your 401k or

prematurely take money out of your 401k

without paying that 10% penalty you

still to pay taxes on it but basically

they just kind of wave that and gave you

a little extra time to do it we'll cover

that in a second but it didn't really

come up nobody really asked that well

now we're getting towards a little

deeper I would say into the shutdown

here people were going holy cow I need

some money man I've spent through the

money I have I maybe had family members

you helped or whatever and so I'm

getting the question more and more so we

take money out of the 401k not only to

obviously support yourselves or your

family but maybe to do some crafty

things with it as well because the money

comes out without paying the penalty so

let's address a few things here so the

first thing is I'll explain a few other

questions that I get and then I'll share

some data with you try to help you out

there who's eligible to take out the 401

k loan prematurely for our not loan 401k

withdrawal prematurely if you want to do

it and it's basically anybody if you've

been affected financially if you've been

affected with you get yourself getting

the virus a family member getting out of

the virus a family member maybe got the

virus and you helped take care of them

or that made you want to quarantine or

something like that and you couldn't

work or your job fired you whatever and

for load you or whatever then you're

eligible you can actually self certify

that you are eligible for the withdrawal

you don't actually need to really prove

anything so basically everybody is

eligible it's kind of on the honor

system whether you take that money out

or not the next question I get is is it

alone and it's not alone there's two

differences here you could take a loan

from your 401k and there's actually some

commentary to

dressed that in the carers act but this

is talking about the withdrawal from

your 401k it's not a loan at you just

don't pay the penalty you owe taxes on

it so if you take them on let's say you

take $10,000 out you wouldn't owe the

10% penalty on that amount that is

waived and you have three years to pay

the taxes on that amount so $10,000 can

be spread the taxes can be spread over

three years you also have the ability to

pay it back here's how this works if you

pay the money back let's say you paid

back half of it five thousand goes back

in well that money counts as a rollover

contribution meaning it's just they

pretend like it's money that rolled over

from an old 401k plan and that's how

you'll see it on your transaction

history if you happen to pay money back

if you do pay money back then whatever

tax would be owed on that you can still

stretch out over the remaining three

years you just won't know tax on the

full amount another question I get if I

take ten thousand dollars out and two

years goes by could I wait until the

third year to pay all the taxes and

that's not clear as it stands now the

taxes are spread evenly over the three

years so everybody's working on the

assumption and it basically says you're

gonna spread it out over the three years

but it doesn't say you have to put it

all in the first year or the last year

just says spread it out so you're

basically just paying the taxes on the

money as you have it if you pay the

money back whatever taxes left it would

be owed right now basically

now the question I get you don't have to

take your 401k distribution so if you're

of retirement age or you have an

inherited IRA and you're normally

supposed to take a distribution a

required minimum distribution or an RMD

as they say you don't have to do it in

2020 and the question I get is should I

anyways I mean should I take the money I

maybe maybe it helps I need it or

whatever the answer is if you don't have

to don't do it at all and there's one

reason why I haven't seen anybody else

mentioned this before but there's one

reason you don't want to do this if in

2020 you're trying to take your require

minimum distribution it's actually based

on the end of 2019 s value of the

account right so in 2019 what happened

the end of the year if you had a

$100,000 account that was probably at

its higher point that it's ever been we

go into 2020 and we went up a little bit

and then the virus hit and we fell apart

so you're taking money out of your 401k

down here but their IRS is calculating

the amount you have to take out based on

up here all right so you're taking out

more money than you have to and I've

heard nobody mentioned that but bottom

line is if you don't need that money

there don't take it out absolutely and

then I get the question should I do it I

don't know that I need the money I just

see it's an option to me should they do

it and buy a house or buy a car pay this

off or do whatever I want to run a

scenario buy up Joe do it real quick and

we'll get out of your way this assumes

that you're not able to put the money

back for six months and you're not

contributing so this is just one way to

look at it's not direct but I put your

income there I put if you make a five

percent contribution because maybe

you're laid off or something but you

don't really need the money five percent

contribution that's how much it would

have added up to at the end of six

months based on your income if you got a

match I don't know if you got a match I

threw it in there five percent match at

the end of six months there's your total

on the right hand side there how much

money you would have accumulated in

terms of deposits now what we did is we

looked further out we said what are you

actually sacrificing by taking that

money amount so now our that money out

so we've got the contribution amount on

the left we went ten years out I just

said 6% net return right this is a net

return not saying oh seven percents the

average return no I'm saying six percent

net after however you make your money in

your 401k because they get a little

something out of the mutual funds

there's a fee in maybe you pay something

for help or I don't know whatever you

pay 6% net there's the value ten years

later your money would have multiplied

by one point seven nine times so use

this number right say oh if I'm gonna

take money out yeah I lost my job or

whatever I could take the money out I'm

not contributing to the 401k I'm

thinking about paying off my car buying

my car use that number to see if it's

worth it ten years from now one point

seven nine times the amount you would

have contributed twenty years from now

it's 3.2 times what you would have

contributed if you make a 6% average net

return and 30 years from now you've

almost sextuple him out of the of your

money twenty-five hundred dollars thirty

years from now is fourteen thousand

three hundred fifty eight dollars and

you could see you go through the

the kind of charts there so that's that

just wanted to share that with you you

keep that in mind

right the compounding interest thing is

there's another way to look at it other

than just ran a bunch of numbers and see

what happens one last thing

can you still contribute to your 401k

let's say you don't care about taking

out the money

can you still contribute to your 401k if

you're furlough right and the answer is

kind of so if you have sick leave that

you want to cash in medical leave or

something that they've given you that's

not technically income but they're

paying you and it's coming to you yeah

technically you can use that money

there's nothing that says you can't I

don't know a lot of people that may be

in that position but the idea is you

have to have earnings of some kind if

you're cashing out paid time off or

something like that well that counts as

earnings so you could still technically

contribute to your 401k all right so

that's it that is the taking a look at

the questions about the early withdrawal

from the 401k given the rules in the

cares Act of this year so if you're

thinking about taking that early

withdrawal from the 401k you don't have

to worry about the penalty you do got to

worry about the taxes maybe check that

out see if it's something you have to do

and by all means if you have to stay

afloat and this is going to help you

don't let anything scare you away you

got to do what you got to do but at

least no way you're getting into and

know now that you don't have to pay the

penalties and how the taxes work if I

helped you in some way hit the subscribe

button to appreciate and have a great

rest of your day and I'll get out of

your way see you later why should you

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