Q&A: Coronavirus aid law lets you more easily tap retirement savings. That doesn’t mean you should

Dear Liz: You recently mentioned that a person can withdraw money from their 401(k) and spread the taxes over three years. If 401(k) is paid back, they can amend their tax returns to get those taxes refunded. Because of some major home repairs, I asked our accountant about this before we proceeded. He said that he hasn’t read anything official about the above. Would you please provide where you obtained your information, so we can decide if that’s an avenue we can use?

Answer: It’s possible you had this conversation before March 27, when the Coronavirus Aid, Relief, and Economic Security (CARES) Act became law.

Otherwise, it’s kind of hard to imagine an accountant anywhere in the U.S. who hasn’t heard of the emergency relief package that created the stimulus checks being sent to most Americans, as well as the Paycheck Protection Program’s forgivable loans for businesses and the new coronavirus hardship withdrawal rules for 401(k)s and IRAs.

Those rules allow people who have been affected financially or physically by COVID-19, the disease caused by the novel coronavirus, to get emergency access to their retirement funds if their employers allow it.

Even if you do have access to such a withdrawal, you should consider other avenues first.

The income taxes on retirement plan withdrawals can be substantial, even when spread over three years. Perhaps more importantly, you probably would lose out on future tax-deferred returns that money could have earned because few people who make such withdrawals will be able to pay the money back.

A home equity loan or line of credit is typically a much better option for home repairs, if you can arrange it.

Q&A: Where’s my stimulus check?

Dear Liz: My wife and I are retired and don’t have enough income to file tax returns. How can we get our stimulus checks?

Answer: If you get Social Security checks, your stimulus checks will be sent to you automatically, either via direct deposit if that’s how you get your benefits or paper check.

If you don’t collect Social Security yet and didn’t file a tax return for 2018 or 2019 because your income was below the limit to require filing, the IRS.gov website has more information.

The IRS has started sending out stimulus checks via direct deposit for people who filed 2018 or 2019 returns and provided their bank information. Those who filed returns but did not provide their bank information can follow an IRS “Get My Payment” link for assistance.

Q&A: Push lenders for student loan help

Dear Liz: I saw your previous column about the federal student loan payments being suspended by the CARES Act until Sept. 30, with interest being waived. I reached out to my loan servicer about my loans and was told that while they are federal loans, they were made before 2010 and are not covered by the relief bill.

Answer: Your experience is an excellent example of why loan servicers have attracted so much criticism in recent years for misleading borrowers about their options.

You should have been told that although your Family Federal Education Loan (FFEL) program loans don’t qualify, you can consolidate your loans through the U.S. Department of Education’s direct loan program and the consolidation would qualify for relief. You can get more information at StudentAid.gov.

Q&A: What to do after coronavirus takes away your job

Dear Liz: I’m a single mom who just lost my job because of COVID-19. I have a mortgage, a car payment, credit card debt and a child who is headed to college in the fall. What do I do? I am very scared.

Answer: This is a very scary time. Your job now is to identify and use all the resources that may help you. You’ll need to be patient and persistent because millions of people are in the same boat.

Your first task could be among the hardest: applying for unemployment benefits. The Coronavirus Aid, Relief, and Economic Security Act, signed into law on March 27, expanded unemployment relief to include the self-employed (including contract and gig workers), people who work part time, and those whose hours were reduced because of the pandemic.

The act also adds $600 a week to the benefit amount that states offer, a supplement scheduled to last four months, and extends benefits for eligible workers until Dec. 31. In normal times, benefits end after 26 weeks.

The expanded benefits, plus an unprecedented number of job losses, have overwhelmed state unemployment offices. If possible, apply online with your state’s labor department rather than over the phone or in person. You’ll be sent important follow-up information; to avoid delays in starting your checks, carefully read that information and respond to any requests.

Unemployment benefits vary enormously by state. You may get enough to sustain you if you cut unnecessary expenses — or you may not. If you come up short, you have other options.

If your mortgage is federally backed — and most are — the CARES Act gives you a right to forbearance for up to 12 months. There’s also a moratorium on foreclosures and foreclosure-related evictions for these mortgages.

Forbearance means you don’t have to make payments, although interest will typically still accrue. Federally backed mortgages include loans owned by Fannie Mae, Freddie Mac and various federal agencies.

If you’re not sure whether your mortgage is federally backed, call your loan servicer — the company that takes your mortgage payments — and ask. Even if your loan is not federally backed, you may be eligible for some kind of relief. Explain your circumstances and ask what help is available.

Many other lenders, including credit card issuers, offer forbearance options as well. Some have information and application forms on their websites while others require you to call the customer service number to request help. Again, be prepared for long hold times.

You also can ask for more financial aid from your child’s college based on your changed circumstances. Check first to see if the financial aid office has an online form you can use or has outlined its preferred procedure for appealing a financial aid offer.

You may be tempted to put off asking for help, hoping that you will land another job before your household is on fumes. It would be more prudent, though, to assume you could be out of work for many months. Not only is unemployment skyrocketing, but a vaccine also could be a year or more away, indicating the economic disruptions likely will continue.

There’s one other part of the CARES Act that could help you: the “coronavirus hardship withdrawal.” The new law allows you to withdraw up to $100,000 from your 401(k) or IRA without penalty.
The withdrawal is taxed, but you can effectively spread the tax bill over three years. If you can repay the money within three years, you also can amend your tax returns and get a refund of those taxes.

Taking the money and not repaying it could have a devastating effect on your future retirement, but if you’ve run out of other options, a retirement plan withdrawal could help keep you afloat.

Q&A: Giving away your relief funds

Dear Liz: My wife and I are retired. We are comfortable financially, with a generous pension, maximum Social Security benefits due to start in a few months, and three years’ worth of ready cash in the bank. We don’t anticipate touching our investments until mandatory distributions from our IRAs kick in. Now we’re apparently going to get $2,400 tax-free as part of the coronavirus stimulus package. We don’t need the money, nor do we particularly want it. We’d welcome your thoughts on how we can give it away to generate the greatest good, on the individual and societal levels. Where is the “multiplier” effect the greatest?

Answer: Thank you for thinking of others. Donating money to a food bank is always a good choice. These charities often have deals with food suppliers that allow them to create far more meals using donated money than they would be able to produce with donated food. Cash also allows food banks to offer perishables. In some cases, food banks work directly with farmers to supply fruits and vegetables that are too imperfect to sell, which reduces food waste.

One option is to give through Feeding America, which represents a network of 200 food banks nationwide that feed more than 40 million people. Meals on Wheels is another option that helps 5,000 community-based programs.

There are many other ways, of course, to help people hard hit by the coronavirus pandemic. Before you give to a charity, check it out at one of the watchdog organizations such as Charity Navigator or CharityWatch. You’ll want to make sure the bulk of your money supports the cause, rather than fundraising efforts or overhead.

You also can use the checks to directly help people or businesses in need. Buying gift cards from local restaurants and small businesses offers a potential two-for-one benefit: You can give the cards to people who need the assistance while you help keep the businesses afloat. Or you can subscribe to newspapers and public radio stations that are working hard to bring you accurate and timely information about staying safe in the pandemic.