Normally, if you take money out of a retirement plan, 401k, IRA, etc before you are eligible, there is a 10% early withdrawal penalty. With certain restrictions this has been waived for 2020. The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows you to take 100% of your 401k up to $100,000 penalty free in 2020. It’s called a Coronavirus related Distribution. Let me explain. It must be accomplished before Dec 30, 2020. Who’s eligible? Anyone who’s been affected by Covid. To see specific requirements, you can look at A3 on the IRS’s own website here: https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers. Once you have received your Coronavirus related Distribution, you have several options. You can keep it as cash and spend it on whatever you want. The intent being you received a hardship due to Covid and thus you need the cash to pay your bills. In this case since it’s pre-tax dollars, you will be required to pay taxes on it, but you have the next three years available to pay the taxes on it. This is explained in A6 at the above link. Another option is to roll it over to an IRA, a self-directed IRA, or other retirement plan. A rollover is simply a transfer of money from one retirement account to another. Any retirement plan included in the following attachment is eligible including Roth retirement plans: https://www.irs.gov/pub/irs-tege/rollover_chart.pdf. As a reminder, if you rollover from a 401(k) to a Roth IRA, you will still have to pay income tax, but all future earnings will be tax free. The IRS explains this all right there in section A7. You basically have those three years that you would be paying the taxes on it, to put it into an “eligible retirement plan” and thus avoid the taxes. Why would you want to rollover your money from a 401k to an IRA or even a self-directed IRA? I’m glad you asked! Your investment choices are limited with a 401k to what the plan allows. An IRA is much more flexible and allows you to invest in individual stocks, bonds, and options(with certain restrictions). A self-directed IRA allows even more flexibility. It allows you to invest in real-estate. More on that in a following post. The great advantage of a self-directed IRA is that it allows you to write loans to a person or company for an agreed upon interest rate. The local company will then be able to use your self-directed ira money to grow their business and pay you back at your agreed upon terms. Since it’s in your self-directed IRA, that interest will grow tax-free. The beauty of this is that you make money from the interest, the person or company you lent the money to is making money in his or her business, and the local community is prospering. A mutually beneficial agreement for all! If you feel like a self-directed IRA is right for you, I recommend https://www.madisontrust.com/. As always, everything presented here is for educational purposes only. Please consult your accountant to verify this information before making any decisions regarding the information here.
Vincent Cyran
LionHeart Group LLC
