Rule #1 – don’t panic! Develop a repayment plan for your 401(k).

If you tapped your 401(k) due to the pandemic, even if you are not ready to replace the funds, it’s not a bad idea to start to develop a plan to get back on track and saving again.

Folks who took a Coronavirus-related distribution have up to three years to repay it, and they can spread the tax owed over three years as well. If they pay back the full distribution amount within the three years, they can amend their tax returns and get all the money paid in taxes back. There is no requirement to pay back this type of withdrawal, but it may be in your best interest to do so to avoid the taxes and to replenish your retirement account.

A plan loan has less flexibility, and all plans are different. Those who took a plan loan generally have five years to pay it back, but the CARES Act allows qualified individuals to suspend all plan loan repayments until December 31, 2020. The suspension is available for both new loans and loans taken before the Act became law. Be careful about the details, because a loan that’s not paid back will be counted as a distribution and taxes (and possibly a penalty) will apply.

Folks who took a coronavirus-related distribution should know that the CARES Act allows treating virtually any retirement plan distribution from January 1 through December 30, 2020, as coronavirus-related. This applies up to an aggregate limit of $100,000 from all plans and IRAs.

More than one strategy may be needed to return money to your 401(k). Here are some options to consider for replacing the funds:

• Free up cash for 401(k) repayment with mortgage refinancing. Interest rates are low right now. The dollars you save could be used to repay the 401(k) funds.
• Consider a home equity line of credit, taking advantage of low interest rates and the ability to pay back the line of credit over at least 10 years.
• You may benefit from returning 401(k) funds via dollar-cost averaging, where investors re-contribute the same amount at regular intervals. The goal is to pay the money back as quickly as possible to capture the Cares Act benefits and get it growing again. A dollar-cost averaging approach should be completed within three years to avoid the tax consequences.

 

Some folks may not be in a position to put the money back in anytime soon, even with the extra flexibility afforded by the Cares Act. Try to resume normal payroll contributions to your retirement plan as soon as you get a new job or have the ability to do so financially. More details here: https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers 

 

Reach Out To Us: Explore all your options before tapping your 401(k) savings. There’s no rigid repayment schedule for a Coronavirus-related distribution, so the decision on when to re-contribute should be based on your overall financial plan. However savers should aim to pay their distribution back as soon as possible to keep their retirement plan on track. We’re focused on helping you find the right options for your retirement and educating you on your choices, so you make the right moves – not just during this crisis but beyond. Feel free to contact me, Cory Lyon, directly at 561-209-1120. My goal is to assist you in making informed decisions, and I act as a fiduciary for all my clients.

 

TFG Financial Advisors, LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results. Investments involve risk and are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.