SPRINGFIELD, MA (WGGBWHSM) -- The coronavirus pandemic has created a new normal including the way people save.
Western Mass News is getting answers on how to use retirement savings now and still save for the future.
A local financial advisor said new changes implemented by the CARES Act could help people fund their family short term, but as the tax deadline approaches on July 15, there are some things they may want to think twice about.
“The unemployment rate is horrible,” Financial Advisor Richard Pelletier said. “Massachusetts has the fourth worst rate in the country.”
With millions across the country unemployed, modifications made through the CARES Act allows Americans to pull from their retirement benefits without any penalties.
“As an advisor, I'm nervous about that,” he said. “Think about a tube of toothpaste -- you squeeze that and it comes out awfully easy. What's the probability of getting it back in? Not good.”
Pelletier said exceptions made to what used to be the normal rules are both good and bad.
“If you take money out of your 401k and sell stocks at a low price right now to sustain yourself short term, I'll tell you, in 10 to 15 years from now, it's going to have a very negative impact,” he said.
One of the things the CARES Act did was allow the expansion of access to people's 401k, 403b and IRA accounts.
“If you're under 59 and you take a chunk out of your 401k, let’s say your tax bracket is 25%, they added another 10% penalty because you’re under 59 and a half. That's been waived, that's a big help, but you still have your taxes,” he said.
With the tax deadline extended to July 15, Pelletier said many may find themselves in a crunch now to pay what they owe.
“Then comes along coronavirus, and their business is gone,” he said. “I’m afraid a lot of those people used the money they made in 2019 to keep themselves afloat this year.”
Pelletier said to be cautious of taking out of the 401k source to pay any tax liability.
“It's much easier to go to the IRS and say, ‘Listen, I owe you $30,000. Here's $15,000, can we work something out?’ You'll see they'll be very amicable and work out a payment plan.”
For those who don't pay the tax, the consequences will cost them.
“It's a 5% penalty per month,” Pelletier said.
But the IRS is now providing rollover relief for coming tax years with no required minimum distributions for 2020.
“Probability of these things being extended into 2021, I would say highly likely,” he said.
People can still make contributions to their retirement accounts up until the extended tax deadline of July 15.