Retirement Tips During a Crisis

Many of you have contacted me through the Ask Suze feature on my new free App asking all sorts of great questions about retirement saving and spending strategies in light of the current crisis. (If you haven’t joined in, you can download the Suze Orman Women & Money app for free, at Google Play and the Apple App store)

Here’s a roundup of moves to consider:

Your employer announced it is suspending the company matching contribution into your retirement account. If you are saving in a Roth 401(k), don’t make any changes. If you are saving in a traditional 401(k) and you just got word that there will be no match for a while, it’s fine to keep contributing. But if you are eligible to save in a Roth IRA, and you don’t have the budget to save the max in a Roth IRA and save in your traditional 401(k), then I would switch your focus to the Roth IRA for the rest of the year. Building up an account that will be 100% tax free when you retire is a great move you want to take advantage of.

If you are single with modified adjustable gross income below $124,000 in 2020 or married with joint income of $196,000, you can contribute the maximum to a Roth IRA this year. If you are younger than 50 that limit is $6,000 per person. If you are 50 or older, the maximum is $7,000.

The bear market losses in February and March freaked you out. I understand! The speed of the declines and the steep losses was frightening. My hope is that you don’t let the fear keep you from remaining focused on your ultimate goal: a comfortable retirement. Even if you are in your 50s, it is so important to remember that there’s a good chance you will still be alive well into your 80s, and many will be around in their 90s. That’s 30 or 40 years away.

I don’t know if we’re in for more losses as the crisis plays out, but I am very confident that decades from now the stocks you own today will be worth more. That’s a reason to be patient and stay invested in stocks.

And remember that you don’t only own stocks. You have bonds too, right? When stocks fell more than 30% in the worst stretch during February and March, a portfolio split between U.S. stocks and high quality U.S. bonds fell half as much. And for the past 12 months (through late April) that 50-50 portfolio is basically flat: during a period that includes the scary bear market you haven’t lost money. Perspective, my friends.

You heard it’s easier to borrow from your retirement account or make a withdrawal. That’s absolutely true. The stimulus package Congress passed in late March allows you to borrow up to $100,00 from your 401(k) account. Or, if you can show a direct financial hardship caused by the crisis, you can withdraw up to $100,000 from your 401(k) without owing the typical 10% early withdrawal penalty (if you are still working and younger than 59 ½). Keep in mind that money withdrawn from traditional accounts will owe tax on the entire withdrawal. But the CARES Act allows you to spread the tax payments for COVID-19 hardship withdrawals over three years.

I want you to consider borrowing or withdrawing money from your retirement accounts only as a last resort. While it’s encouraging that the government has removed penalties for either move, the fact is you are taking the money out of your retirement. Even if you intend to pay it back, there is no guarantee you will do that. And in the meantime, you have less money invested. If the markets rally during the next year, or 2 or 3, you will miss out. When you take money from your retirement accounts you are borrowing from your future retirement security. The best move you can make is to not touch your retirement savings today unless it is absolutely necessary.

You haven’t taken your 2020 RMD yet. The CARES act says it is okay to skip taking your 2020 required minimum distribution from your IRAs or 401(k)s. If you want to take the RMD you can, and should! All the law says is that if you don’t need it, and don’t want the money, you can just leave it in your account. If you don’t need the money, and it is in a traditional 401(k) or IRA, you might consider not touching the money. That will help reduce your 2020 tax bill: withdrawals from traditional accounts are taxed as ordinary income. If you don’t make a withdrawal, no tax!

For those of you who already took your 2020 RMD and wish you hadn’t, you may be able to put the money back (and owe no tax.) If you took your RMD within the past 60 days, contact the brokerage or plan administrator that holds the money and tell them you want to return your RMD. Within 60 days it’s an easy move.

If you have already blown past the 60 day rule, be patient. It is likely that the IRS will issue guidelines in the coming weeks that will allow you to return the money as well; but we won’t know for sure until the overworked IRS focuses on this part of the new legislation.  I will keep you posted.