The CARES ACT Makes 401(k) Withdrawals Easier, but Should You?

The CARES ACT Makes 401(k) Withdrawals Easier, but Should You?

by | Accounting News, COVID-19, News, Retirement, Tax

Customarily, retirement savings plans such as 401(k)s are tough to withdraw from before age 59.5 without accruing penalties and tax withholdings, but the CARES Act, which was passed by Congress in response to the economic hit caused by the Covid-19 pandemic, temporarily eliminated such penalties. Now that you can more easily access assets that have been set aside for future use, should you?

Amended Penalties for Early Withdrawal

Recognizing that many Americans who live paycheck to paycheck would need access to funds in the face of lost income as a result of government shutdowns, Congress passed the CARES Act, which temporarily eliminates the 10% early-withdrawal penalty and the 20% federal tax withholding on early 401(k) withdrawals. Taxes on any withdrawn funds will still be applicable because the original contributions were pre-tax, but whereas those taxes are typically due within the same year as the withdrawal, the CARES Act permits the amount due to be stretched over a period of three years.

Be Aware of Potential Penalties

It may seem as though the vault has been unlocked, but before you decide to take advantage of the easily accessible funds, you should consider the potential ramifications of such a move. If the amount withdrawn isn’t returned within the three-year window (either in one lump sum or in multiple payments over three years), you will be responsible for paying income tax on the withdrawal. This could be a significant amount depending on the size of the withdrawal. It’s also worth remembering that for the amount of time the funds are out of your retirement savings, they discontinue making returns on your investment, which could result in potentially long-term consequences, including compound tax deferred growth benefits.

Remember the End Goal

If you are struggling in today’s economic downturn, the laxed rules and penalties to access retirement funds is tempting, but it’s important to keep the end goal in sight, which is retirement. The long-term impact to your savings, even when it’s paid back over time, may not be worth it. Unless you’re really struggling to make ends meet, the best move is to leave the money in your 401(k). Cashing out now, when the market reflects depressed values, means that you’d be selling low, which isn’t a recommended strategy.

Hidden Retirement Fees to Be Aware Of

Hidden Retirement Fees to Be Aware Of

by | News, Retirement, Tax, Tax Planning - Individual

Financial advisors commonly advise their clients to seek investments with high returns in order to maximize their retirement funds, but most investors don’t realize that high fees are eating into those earnings.

While fund fees have steadily declined in recent years, many investors don’t realize how much they’re paying in fees to begin with or how much these expenses and other investment costs are eating into their retirement savings. Remember that as your investment returns compound over time, so do the fees, which means your payments could accumulate to 2% or more.

Below are some of those hidden fees and what you can do to avoid them.

Expense Ratios

This refers to the annual fees charged by all mutual funds, index funds, and exchange-traded funds as a percentage of your investment in the fund. Expense ratios apply to all types of retirement funds, such as your 401(k), individual retirement account, or brokerage account, and they cut a percentage of your investment in the fund depending on its annual yield.

Mutual Fund Transaction Fees

This is a fee you pay a broker to buy and sell some mutual funds on your behalf, similar to a “trade commission” that a broker would charge to buy or sell stock.

Sales Load

These fees surface when a broker successfully sells a fund to you that has a sales charge or commission.

Administrative Fees

These fees are associated with maintaining your portfolio or brokerage account.

Brokerage Account Inactivity Fees

If your account allows you to buy and trade at any time, you could face an unexpected inactivity charge if you don’t trade for a few months.

To determine whether your retirement fees are too high, check the fee disclosure and look at the expense ratios on the mutual funds you are invested in. Likewise, check these fees before you invest in a mutual fund you are interested in.

To help balance your investment accounts and minimize your retirement fees, take advantage of lower-fee mutual funds if your 401(k) plan already has an expense ratio of over 1%.

Finally, be aware that fees may also be related to how much advice you’re getting and where that advice is coming from. Human advisors are more expensive than robo-advisors, and an actively managed fund will cost more than an index fund or an exchange-traded fund (ETF).