Last week I spoke with greater detail about the one-time payment that most Americans will be receiving, probably by mid-April. The checks will be for, at least, $1,200 plus another $500 for each child in the family.
This payment and the information I’m going to be talking about today is from the Cares Act which was passed by Congress in late March in what amounted to a truly massive and ultimately, historic piece of legislation.
Also, while the media’s focus has been on these one-time checks, there were a lot more goodies included in that bill that I want you to know about because, basically, there’s a lot of good stuff coming our way.
First, for retirees, there are some changes that will offer a lot of relief, especially during this time of low-stock prices and low-interest rates.
You may want to have a pen and paper handy as I list these things, or just come to our website, stevepomeranz.com, to read or hear this commentary. Also, if you are signed up to receive our Weekly Update, you’ll get it there too. You can easily sign up for the Update at the website too.
Here’s the first “biggie”: For your retirement accounts like IRAs, Pensions, and so on, the Required Minimum Distribution, commonly referred to as the RMD, has been suspended this year. Yes, you heard me right, you will NOT be required to pull out ANY money from your retirement accounts in 2020.
Of course, you can if you want, but it will not be REQUIRED.
This will help you if you have to sell your stocks to raise the cash to distribute. This moratorium will allow you to hold on to your stocks with the hope that they will rebound in the near future.
This is not the first time Congress allowed you to delay your RMD. This previously happened during the last financial crisis when the stock market crashed in 2008-09. Congress suspended RMDs for 2009.
And another thing, since the calculation for your withdrawal is based on your account values as of December 2019 when the market was much higher, had you been required to take a distribution this year, you would have had to pay taxes on money that has essentially disappeared.
That’s one of the “Biggies” I was talking about.
For you folks younger than 59 ½, you will be able to take up to $100,000 from your 401k free from a withdrawal penalty. You may remember that retirement plan withdrawals prior to age 59 ½ carry a 10% penalty. This law waives the penalty up to a $100,000 withdrawal.
Here’s another cool benefit from the law: You can take up to 3 years to pay back the taxes due on the withdrawal. You see, they’re thinking about your cash flow and this will help your cash flow in the near term.
Once things aright themselves, you can pay back all or a portion of the withdrawal within three years too, and that’s over and above any contributions that you make to the plan.
Let me take a minute to give you a little second-level insight to a conundrum I have talked about for many years on this show.
We all know that it’s never a good idea to dip into your 401k because this is money set aside for the future, and you’re going to need it because the future isn’t getting any cheaper. However, if you are in dire straits, you gotta do what you gotta do. No guilt about it, you have to survive.
But there’s an irony to all this.
Experts will tell a young person to invest in stocks for the long term because the potential to create wealth that way is very strong. There is nothing wrong with this advice except that it doesn’t take real-life into consideration. I often say that if we were all Rip Van Winkle and fell asleep and woke up 20 years later the chance of waking up considerably wealthier is very high. Fortunately or unfortunately, we are all awake every day, and stuff happens—recessions, wars, coronaviruses—and adjustment for these events have to be made.
So, here’s my point: If investing in stocks is, essentially, an investment in the economy and your job is also affected by the economy, both could go negative simultaneously. You could lose your job exactly at the time the stock market goes way down. Meaning if you have to take money from your 401k because, as I said before, “you gotta do what you gotta do,” it’s going to hurt you to sell when the market is low.
One way around this is to make sure you have a healthy emergency fund so you don’t have to tap into the 401k—3 months or maybe, if you can swing it, 6 months should get you through some of the harder times.
Another way to protect yourself is to keep a portion of the 401k money in fixed income instruments, like bonds or CDs. Yes, you will lose out on potential future returns because the yield on bonds and CDs is very low, but your future return will still be substantially higher than if you sold all your stocks at the low point in the market.
The lesson here is to remember that both your job and your stock investments are affected by the economy which makes them correlated to each other. Meaning, when one goes down, the other is likely to go down too. They are not separate and don’t operate in separate worlds.
I have provided links to all this on my website, stevepomeranz.com, and all of our segments are posted and archived with a search feature if you’re looking for something in particular.
And don’t forget, we love to get your questions, so go to stevepomeranz.com to ask them. That’s stevepomeranz.com.
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