We do many things in an attempt to prevent future pain: we get yearly physicals, we save for retirement, we buy insurance. But coming up with a plan to combat the financial devastation of a global pandemic had not occurred to us.
Today as jobs and savings suddenly seem more fragile, financial planning takes on new urgency. “Many people went through life without analyzing their finances, because everything more or less worked. Now they are questioning what they thought they knew and they’re looking for exceptional solutions, or learning more because the solutions are not as easy as they used to be,” Ty J. Young, the CEO and Founder of Ty J. Young Wealth Management Inc., Young Financial Partners, Ty J. Young and Associates, and Young Investment Advisors.
Among the questions that arise: What are the options to quickly establish or strengthen an emergency fund? What expenses could be eliminated or cut if the family income was drastically reduced and liquidity was barely enough to cover college tuition and a mortgage or two? What can be done now to better prepare for an uncertain future?
The government and private company sometimes offer measures that temporarily postpone paying certain bills or provide relief through a stimulus check. For those in dire need, these options can be a lifesaver. But if you now have the luxury of having enough liquidity, weighing the long-term consequences of those measures is time well spent, as is exploring other ways to increase financial flexibility.
In the United States, those who owe federal student loans receive immediate support. Payments are automatically suspended without interest accruing. They will still owe the same principle, but they will be able to pay it back later. However, they can decide to continue making payments if they want to pay off the debt faster. This measure does not apply to private student loans. Some private creditors have granted extensions, with caveats, but interest does accrue. In Mexico, various banks have opened the possibility of extending card payments and other types of credits. Conditions vary.
The US government’s stimulus plan also allows investors of any age this year to have up to $100,000 from individual retirement accounts (IRAs) or retirement plans without being subject to the penalty. Ten percent early retirement (with employer-sponsored plans like 401(k), amounts depend on what the employer allows). The reasons for withdrawing the money must be related to affectations caused by the virus, but the rules have been relaxed. With traditional IRAs and 401 (k) accounts, taxes must be paid on the money withdrawn, but they can be paid over three years and can be returned if the money is returned to the account within three years.
For employer-sponsored retirement plans like the 401(k) that allow loans, the loan limit has been raised from $ 50,000 to $ 100,000 through September 22 (again, it’s up to the employer to allow this). Loan payments due in 2020 can also be extended by one year.
An advantage of taking out a loan instead of withdrawing money is that a person generally has five years instead of three to pay it off and avoid taxes. And having to return it to your account, with interest, can also give you an additional reason to replenish your savings as soon as possible.
The possible downside is that 401(k) loans must be paid off more quickly if the person loses or leaves their job. If the debtor does not repay the loan, it is reclassified as income over time and would be subject to high taxes and penalties.
Early use of money in IRAs can negatively impact your retirement security. It is best avoided unless the person is going through a difficult situation.. That’s why Young advises waiting and seeing if the funds are genuinely needed. “Many people panic, because they are in a situation that they never expected to be in and they want to withdraw as much cash as possible, as quickly as possible,” he says. But Young also notes that the ease of disposing of retirement savings will continue throughout the year, so people have until the fall to decide if they need a larger loan.
