- What's goin' all y'all,
welcome back to Channel Wealth Hacker Labs,
I'm your gracious host Jeff Rose.
Many of you are still waiting for your
$1,200 economic stimulus check to arrive.
Eighty million got a direct deposit.
Seventy million are still waiting.
You got the Payment Status Not Available,
you got people saying that
checks are gonna be mailed out on the 24th,
with really no confirmation of that.
I've actually had a few people share in the comments
that they said that their check was gonna be mailed out
and they actually already got it so, all right!
That is awesome news.
But for those that are still waiting
or those that already got your check,
and you're still struggling, trying to make ends meet
because your job is still shut down,
or you're furloughed, or you're unemployed,
laid off, whatever the situation may be,
and if you're still trying to figure out
how you're going to pay the bills,
one of the other provisions of the CARES Act
that was included, that many people don't know,
is that there was an update to the 401(k) plan
and the updates had to do with how you could
either borrow from a 401(k) plan,
or how you can take a distribution or cash it out.
So what were these key changes?
So prior to the Coronavirus, prior to this whole pandemic,
you could borrow from your 401(k) plan
if your employer allowed it.
And the way that it was written in the IRS Code
was that you could borrow up to $50,000
or 50% of your 401(k) balance.
So if you had $50,000 then you could borrow
$25,000, or if you had $100,000,
then you could borrow $50,000 or that 50%,
and then based on whatever you borrowed,
there was an interest rate attached to that
and then you had to pay that money back over time
and if you didn't pay that money back
in that stated time period, then you would be assessed
that 10% early withdrawal penalty.
So what were the changes in regards to
borrowing from your 401(k)?
Well instead of $50,000 or 50%,
the IRS changed it to where you can borrow up to $100,000
or 100% of your balance.
So in that first scenario if you've got
$50,000 in your 401(k) plan and you can now borrow
up to that $50,000.
So that is a big, big change.
The other change is that
they are not requiring any of those loan paybacks,
any of those loan payments, until after 2020.
So they have suspended all payments
back to these 401(k) loans for the rest of the year.
And for many of you like that is a big deal,
to be able to have access to your 401(k),
not have to make any loan payments for the rest of the year.
Now the one thing I do want to say
and I thought about saving this until the end
but I would like to say, is that, in normal situations
I am never an advocate for borrowing from your 401(k) plan
or taking a distribution, and that's just with my background
as a financial planner, I've witnessed so many situations
where people were borrowing money or taking money
from their plan, when they really didn't need to,
that they could have cut back on their spending,
they could have just actually tried to budget
or live within their means
and it wouldn't have been an issue.
So in those situations like I just (chuckles)
I just got AHH!
Don't borrow from your 401K plan!
Like stop, trade in the brand new car
like you don't need that.
Now this is an entirely different situation,
like this is a global pandemic, which you all know,
and in light of what's going on,
you know no judgment passed, if you are in a situation where
it's beyond your control because you can't go to work,
because you had a good job but you got laid off,
or you got furloughed and this is what you need
to take care of your family, to take care of you,
so if that's the case, then do what you got to do.
So that is in regards to borrowing from your 401(k) plan.
You can borrow up to 100% or that $100,000.
Whenever payments do start back,
if you do not pay back the loan,
there will be that 10% early withdrawal penalty.
So that's borrowing.
Now the other thing that you can do is if you have
a old 401(k) plan that's still a 401(k),
you haven't done anything with it,
you can take a distribution from your plan.
That is not an update.
That is something that you could have done in the past
but before, if you were under the age of 59 and 1/2
and you took money out of an old 401(k) plan,
you would have to pay a 10% early withdrawal,
and they would take out a minimum 20% for federal taxes.
Now with that whole federal tax thing,
that's just what they, they did that to help people out
because most people just thought,
oh I'm gonna take the money, I'm gonna go spend it,
and at the end of the year
whenever they're doin' their taxes,
they realize, oh crap, I should have set some aside
to pay Uncle Sam and they didn't,
now they're on the hook for
a several thousand dollar tax bill
so the IRS said hey, we're just gonna go ahead
and make it 20%, so that people don't have to
try to figure out how much it is.
You could take more taxes out
and so if you knew you were in a higher tax bracket,
then that would help alleviate some of that tax burden
at the end of the year,
and if you were in a lower tax bracket
then you would get a refund.
So what is the big change and this is a very big one.
The IRS for the time being has eliminated
the 10% early withdrawal penalty.
So this is one of the big updates in the CARES Act.
So there is no longer a 10% penalty to take the money.
In addition to that, the 20% withholding,
prior to all of this, you had to pay all that tax
by the end of the year, whenever you filed your taxes,
like that was part of your tax bill.
So now instead of having to pay that at the end of the year,
they are, and when I say they,
the IRS, is extending that 20%
tax over a three-year period.
So they're giving you up to three years to pay that back.
That is huge!
So if we go back to somebody that has a $100,000
and they need it, for whatever reason,
they could borrow that from their 401(k),
and they take that full,
I'm sorry not borrow,
but they take a distribution and they've taken $100,000 out,
and so they're on the hook for at least
$20,000 in federal tax, they don't have to pay a 10% penalty
so there's $10,000 more that they have to use
to help float whatever they need to float
and now they can pay back that $20,000
over a three-year period.
Like that is a big deal.
Now to qualify for these updates,
these updates on the 401(k) plans,
there are certain criteria that you have to meet.
Now as I share what these criteria are,
I think you'll see that it's pretty easy.
The IRS, the government made it pretty easy
that you can check one of these boxes.
So the first criteria is that you, or your spouse,
or a dependent, has been diagnosed with the Coronavirus.
Now that might not apply to you, if it does,
Godspeed, hope that you're doing well,
hope you're on the way to recovery.
If this doesn't apply to you, then go ahead and stay tuned
because I think the next one probably will.
You've experienced adverse financial consequences
as a result of being quarantined, furloughed, or laid off,
or your work hours have been reduced.
Anybody want to raise their hand on that one?
I think that applies to a lot of Americans right now.
Another criteria is you're unable to work
because of a lack of childcare.
So you've got nobody to watch your kids,
I'm raisin' my hand on that one too.
You had to close or reduce the hours of a business
as a result of a virus.
Many people could check that box.
Or, you've been financially impacted by other factors
determined by the Treasury Secretary.
As you can see I mean they've made it pretty general
so that anybody for the most part,
should be able to apply this
because they know that people are hurting.
But I do want to challenge you that if this,
the 401(k), whether you're borrowing
or taking a distribution, taking your money out,
this does need to be a last resort.
Try to figure out another way if possible.
If you can't, I totally understand.
Do what ya' got to do.
But as a former financial planner,
like this is one of the hardest things for me to see
whenever I saw a younger person especially
taking money out of a 401(k) plan,
because I didn't see them taking out $1,000 or $10,000,
what I saw was the future value of that money.
You know, for example, if somebody had $10,000
in a 401(k) plan and they invested that
over a 25-year period and made a modest 7%,
we're talking almost $55,000 that they would have later on.
So I don't see $10,000 being taken out,
I see $55,000
or $250,000
or $500,000 or a million,
if they were cashing out their retirement plan
when there really isn't a justifiable reason.
Once again, this is an entirely different situation,
so as long as you're not taking the money out
to buy a new car, you and I, we're good.
But if you're taking the money out
because you've got kids that depend on you.
Because you've got a roof over your head
that you've got to pay the mortgage on, totally get it,
totally understand, hope that everything
is going to get back to somewhat normal, whatever that is,
like still a lot to be seen.
But this is information for you on 401(k)s
in regards to the CARES Act.
I'll have a link in the description
that has more of this all of the criteria that I shared
some of the numbers that I shared
in case that didn't all register.
Obviously you can leave a comment,
or leave a question in comments
and I'll do my best to get back to ya'.
All right y'all, this is Jeff Rose reminding you
that it's your money, it's your life
and only you can make it awesome.
Until then, peace.