Most of us who work full time for a company (privately or self-owned) have some type of retirement plan that our employer helps contribute to. In this article, for ease of communication, we will call them 401K plans in this article, but there are many other types with various names.
Your company administrator can help you with any questions you have about your plan. During the COVID-19 pandemic, people are looking at all of their options for staying financially ahead and their retirement plans often offer a way to borrow a substantial amount of money rather quickly. Let’s take a look at this option and how it is viewed while you are in the process of filing a divorce.
Can I borrow from my 401K if I am getting a divorce?
The easy answer is, it depends. You will need to speak to your attorney. While in most cases the retirement funds will be divided 50/50, that may not be the problem. In some states, one spouse cannot take money from the account without the signature of the other. It may not be so easy to get your “soon to be” ex, to happily sign their name so you can get up to $100K of your money to make your life easier at this time. You may have to do some bargaining to ensure it makes their life easier too. During a divorce, both of you may need some financial support and it may be an option they had not considered.
In normal circumstances, if you are younger than 59 ½ years old and you need to borrow money from your retirement funds, you are charged a 10% penalty and some steep taxes and penalties. This is to encourage you to find another way to get through your situation and leave your 401K untouched. But, a worldwide pandemic is not a normal situation and the government stepped in, to wave taxes and penalties so you can access your money fast.
The IRS answers FAQ
Almost immediately, when the IRS published the relaxed rules, people began drawing their money out of their plans. The maximum they could draw was $100,000 and that number was requested over and over again. Read on for more information.
Below we will list some of the most common questions asked to IRS. Due to the massive number of retirement plans and the numbers of people that are involved, you may have to research your retirement plan to see where it fits. Of course, you can ask your retirement company, your retirement plan administrator, or the Internal Revenue Service for clarification.
- You qualify if you or your spouse or dependent tested positive for COVID-19. If your life has been impacted by the pandemic (even broadly) there is a good chance you qualify. If you lost your job or a portion of your income, or if you were unable to work because of a loss of child care or even if you own your own business but had to work fewer hours due to the pandemic, you most likely qualify.
- The maximum you can take as a withdrawal or a loan is $100,000. This is the same for ex-spouses who were awarded retirement funds belonging to a previous spouse.
- In some cases, you will be allowed to treat the loan like a short-term loan and repay it without penalty. This is not true for all plans. Your plan administrator can advise you. If your situation in this time of a pandemic improves and you want to replace the money you took from your plan, you should expect the payments to be expensive. They are usually paid back over a period of 3-years and the payments are over $1800 per month. However, if you are in a situation where you can do this and your plan allows it, repayment puts your savings back to the original position.
Bonus hack for older employees
During our working lives, Americans pay 6.2% to the federal-set wage base. Our employers match our contribution. When we reach the age of 67, we can begin drawing that money in monthly checks from the Social Security Administration.
Sometimes life does not follow our plans. If you are a 62-year-old employee and COVID-19 caused you to lose your job, it may not be easy to find another job right away. While you will receive less money per month, you can begin your Social Security payments early.
Now let’s say a year down the road, you have returned to work. You can contact SSI and ask them to “voluntarily suspend” your payments. Your payments will be stopped and interest will be paid into your SSI account. If you begin your SSI payments when you have reached the age of 66-years and 2-months, your payments will be within a few dollars of the original plan amount.
This does not restore you to your original position, but it gets you very close. It also allows the person who is retiring to control their own destiny. Some people do not want to retire early. They want to plan their own lives around the schedules of their families and loved ones. The few dollars they return to their SSI may or may not make a difference to their quality of life.
Regardless, it is their choice to make. This option allows them to do just that. Make their own choices. This just might be the option you need to allow you to get through this difficult time with a little less stress.