Stimulus package - withdraw $100k from IRA, tax favored

Catlady

Catlady

Well-known Member
Location
Southern AZ
https://www.marketwatch.com/story/c...liability-2020-03-27?siteid=yhoof2&yptr=yahoo

"IRA owners who are adversely affected by the coronavirus pandemic (and there will be plenty of them) will be eligible to take tax-favored coronavirus-related distributions from their IRAs. To keep things simple, let’s call these distributions CVDs. They can add up to as much as $100,000. You can recontribute a CVD back into your IRA within three years of the withdrawal date and treat the withdrawal and later recontribution as a totally tax-free rollover."

"As long as you recontribute the entire CVD amount within the three-year window, the whole deal is treated as a tax-free IRA rollover transaction or a series of tax-free rollover transactions. If you’re under age 59½, the dreaded 10% penalty tax that usually applies to early IRA withdrawals does not apply to CVDs. "
 

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Aunt Bea said:
IMO the average person would be better off to tough it out and not risk future security by borrowing against a retirement account when the financial markets are in such bad shape.
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You know Aunt Bea I'm in that retirement boat. I'm limited to the amount I can withdraw each year unless I want to pay about 50% tax. I'm approaching 90 and I saved for my old age and I would prefer the money now. No one knows how long they are going to live. See if you pulled it before you wouldn't have to worry about the market. It's a gamble. Do you retire early and enjoy less now or delay on retiring late and getting more? Investors now recommend getting out at 60. I waited till 67 and getting maximum pension but that's just luck.
 
Aunt Bea said:
IMO the average person would be better off to tough it out and not risk future security by borrowing against a retirement account when the financial markets are in such bad shape.
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I agree, but if they're the type without emergency savings and can't pay the mortgage/rent and other bills, this will help out quite a bit. If they take it out for frilly purposes, then I say ''You can't fix stupid".
 
I still think that it's better to look for other options now being offered by various government-funded programs or to borrow money from a credit card.

The average person with a 401K would have to sell depressed investments for 75 cents on the dollar to make the withdrawal and risk missing out on the recovery. If they do eventually pay it back they could end up repurchasing the same investments at much higher prices.

Some astute investors may be able to create wealth using some form of arbitrage but the average guy will take it on the chin.

IMO people should never look at their retirement funds as piggy banks.

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C'est Moi said:
I think most people needing to "borrow" $100k would have difficulty paying it back in 3 years. 🤔
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That's the thing it's a loan or suffer the early withdrawl penalties. Hmmm, deal with loan shark down the street or the IRS. Some will wind up sand bagging their retirement thinking they might not even be around.
 
Aunt Bea said:
I still think that it's better to look for other options now being offered by various government-funded programs or to borrow money from a credit card.

The average person with a 401K would have to sell depressed investments for 75 cents on the dollar to make the withdrawal and risk missing out on the recovery. If they do eventually pay it back they could end up repurchasing the same investments at much higher prices.

Some astute investors may be able to create wealth using some form of arbitrage but the average guy will take it on the chin.

IMO people should never look at their retirement funds as piggy banks.

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I usually agree with everything you say Aunt Bea but borrowing from a credit card is a very bad idea. The interest rates would be way too high, since they consider that a cash advance. I've seen interest rates at 17% up to almost 30%. Even if the credit card companies give an introductory 0% rate, that's usually no longer than 15 months. People who are already struggling may likely only be able to pay the minimum. Here's a scenario in a TD Bank solicitation I received last year. A person with excellent credit (thereby the lowest rate) would have to pay $495 a month for 5 years.
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OneEyedDiva said:
I usually agree with everything you say Aunt Bea but borrowing from a credit card is a very bad idea. The interest rates would be way too high, since they consider that a cash advance. I've seen interest rates at 17% up to almost 30%. Even if the credit card companies give an introductory 0% rate, that's usually no longer than 15 months. People who are already struggling may likely only be able to pay the minimum. Here's a scenario in a TD Bank solicitation I received last year. A person with excellent credit (thereby the lowest rate) would have to pay $495 a month for 5 years.
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You can disagree with me and I would encourage you to do what you feel is best for your situation.

I chose to struggle during my working years so I wouldn't have to struggle in my old age.

Some well-intentioned people use their retirement funds to help them balance the budget in tough times but I believe that it is absolutely the worst thing that anyone can do.

I would rather risk bankruptcy with 100K in credit card debt than risk the loss of 100K of what would normally be protected retirement money.

It's just one of the many choices that we will all face at some point in our lives.
 
Aunt Bea said:
You can disagree with me and I would encourage you to do what you feel is best for your situation.

I chose to struggle during my working years so I wouldn't have to struggle in my old age.

Some well-intentioned people use their retirement funds to help them balance the budget in tough times but I believe that it is absolutely the worst thing that anyone can do.

I would rather risk bankruptcy with 100K in credit card debt than risk the loss of 100K of what would normally be protected retirement money.

It's just one of the many choices that we will all face at some point in our lives.
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I totally agree with you about not borrowing from a 401K. In fact I've advised a couple of Gen-X'ers to just not do it. Your point about being able to file for bankruptcy is an interesting spin on why you would choose the credit card option. Blessedly like you, I don't have to worry about any of that because I did as you did during my working years.
 
I think there are certain instances where borrowing from a 401k works out well. I've done it myself a couple of times. I've always paid it back quickly, well before the length of the loan was up. You have to know what you're doing and make sure the reason you're borrowing is sound.
 
it isn't just about paying it back .... taking a loan during a bull like we had can cost you a fortune in lost gains .... you get no return except the small amont of interest you pay on the money loaned out ....pieces of your investments are liquidated to provide the borrowed money ... a loan last year would have cost about 30% in lost gains... since markets are up 2/3"s of the time and down only 1/3 odds are that can be one of the most costliest ways to borrow money .

a credit card at 24% would have been a better deal then what it cost pulling the money from a 401k .

few plans let you choose which investments the money comes from . the usual procedure is to automatically liquidate equally from all investments to provide the borrowed money so most are not aware the returns on their money stopped on the borrowed amount .

few people realize that in a loan from a 401k the money does not fall from a tree , but rather your own investments are liquidated to provide that money and that can be costly in return
 

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