Ask Liz Weston

Get smart with your money

Q&A

Q&A: Here’s why taking money from retirement accounts to pay bills is dumb

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Dear Liz: I do not qualify for a coronavirus hardship withdrawal, but I have debt on several credit cards with interest rates above 23%. In 2019, I paid nearly $2,500 in interest charges. I would like to remove $10,000 from my IRA and use it to pay off the debt. I would then put the money that would normally go toward the credit card debt ($500 a month) to pay back the IRA. Would this repayment mitigate some of my tax charges from the withdrawal, and how long do I have to replace the funds, if any?

Answer: Coronavirus hardship withdrawals are available to a large group of people, including those who have lost their jobs or suffered other financial setbacks because of the pandemic, as well as people actually diagnosed with COVID-19, the disease caused by the novel coronavirus.

Coronavirus hardship withdrawals allow people to take out up to $100,000 from individual retirement accounts or 401(k)s without paying early withdrawal penalties or facing mandatory withholding. Income taxes must be paid on the withdrawal, but that bill can be spread over three years.

People who take such withdrawals would have the option of putting the money back within three years. If they can repay the money, they could amend their previous tax returns to get a refund of the taxes they paid on them.

If you don’t qualify for a coronavirus hardship withdrawal, then the rules on taking money from your IRA haven’t changed. You cannot take a loan from an IRA, and any money you withdrew would have to be returned to a qualifying retirement account within 60 days or it’s considered a withdrawal.

You would have to pay income taxes on the withdrawal, plus the 10% federal penalty if you’re under 59½. Most states also tax and penalize such withdrawals.

Even if you could qualify for a coronavirus hardship withdrawal, though, it would be a bad idea to raid your retirement account to pay credit card bills.

Not only is the tax cost high, but you’re also losing the future tax-deferred returns that money could have earned. A $10,000 withdrawal now could mean $100,000 less in retirement funds 30 years from now.

Also, you shouldn’t use an asset that would be protected from creditors to pay debts that could otherwise be erased in case you have to file for bankruptcy.

Too many people drain their 401(k)s and IRAs trying to pay their bills, only to find out too late that their retirement accounts are protected in bankruptcy. Meanwhile, the bills — including credit card balances, medical bills and most other unsecured debts — could have been wiped out.

If you can make your credit card payments but want to reduce your interest costs, you could consider a personal loan to consolidate your debt if your credit is good. If your credit is not good or you are struggling financially, you could contact a credit counselor about a debt management plan that would allow you to pay off your cards over time at lower rates.

You can get referrals from the National Foundation for Credit Counseling.

Another option for people struggling to pay off their credit card debt is to ask the issuers about hardship programs. Many are willing to offer forbearance, which allows cardholders to skip payments, or to temporarily reduce required payments.

If you’re struggling, though, you also should make an appointment with a bankruptcy attorney about your options. You can get referrals from the National Assn. of Consumer Bankruptcy Attorneys.

Q&A: Push lenders for student loan help

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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

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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: Volatile markets and retirement

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Dear Liz: With the tumult in the stock market, I’ve been thinking of a strategy which may be safe but not prudent. I have about $315,000 in a trust account which pays me about $9,000 a year in dividends. I’m 81. If I sell all the stocks in my trust account, I could draw the same $9,000 for over 10 years, not counting about 2% growth on the $315,000. What are your thoughts?

Answer: Many people have discovered they’re not as risk tolerant as they thought they were. The volatile stock market has unnerved even seasoned retirement investors. Most, however, should continue investing because they won’t need the money for decades, and even retirees typically need the kinds of returns that only stocks can deliver long term.

There’s no reason to take more risk than necessary, however. If all you need from your trust account is $9,000 a year, you’d be unlikely to run out even if your money is sitting in cash. But you may need more than $9,000 in the future — to adjust for inflation, for example, or to cover long-term care costs.

One option to consider is a single-premium immediate annuity. In exchange for a lump sum, you’d get a guaranteed stream of monthly checks for the rest of your life. At your age, you could get $9,000 a year by investing about $100,000 in such an annuity. Because your payments would be guaranteed by the annuity, you might be more comfortable leaving at least some of the rest of your account in stocks for potential growth.

Q&A: Giving away your relief funds

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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.

Q&A: How to figure out if your student loan qualifies for coronavirus relief

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Dear Liz: I’m confused about what help is being offered to people with student loans. At first I heard interest was waived but payments had to be made. Then supposedly the stimulus package made payments optional. Is there something I have to do to get relief or is it automatic?

Answer: If your student loans are held by the federal government, relief should be automatic. You won’t have to make a payment until after Sept. 30, and interest will be waived during that time. In addition, federal collection efforts on defaulted student loans have been paused.

These provisions of the Coronavirus Aid, Relief and Economic Security Act apply to federal student loans made through the direct loan program, including undergraduate, graduate and parent loans. You can log on to studentaid.gov to see if your loan qualifies.

If you have Perkins loans or Federal Family Education loans that don’t qualify, you can consolidate those loans into a direct consolidation loan, which would qualify. The provisions also don’t apply to private student loans, although your lender may offer other hardship options.