The Senate relief package that is currently stalled in the Senate has as one of its features a proposal to waive the 10% penalty for early withdrawal of up to $100/000 from qualified retirement accounts for coronavirus-related purposes.

Individuals who are eligible for this exemption include people who have: been diagnosed with COVID-19, the disease caused by the novel coronavirus; whose spouse or dependent has been diagnosed with COVID-19; who experience “adverse financial consequences” as a result of being quarantined, furloughed, laid off or having work hours reduced; been unable to work due to lack of child care due to COVID-19; or lost their business because of COVID-19.

Typically, early withdrawal of retirement funds comes with a 10% penalty if you withdraw the funds before age 59 1/2. Of course, unless the retirement plan is a Roth IRA (open for at least 5 years if you are withdrawing earnings), you also pay ordinary income tax on the withdrawal.

That’s all we know right now. We don’t know how eligibility will be monitored, or whether or not the law will be retroactive for some period of time or how the proposal might be changed or even eliminated in the negotiations that are ongoing now between Democrats and Republicans.

[NOTE: As I write this, the bill is scheduled for a vote today after Democrats broke off negotiations yesterday. Of interest to many is that the bill, as currently written, also provides up to $1200 to taxpayers who earn less than $99,000 per year, provides loans for small businesses and large tax cuts for corporations.]

There is another “penalty’ for early withdrawal that this bill won’t help and that is the losses that will be realized due to withdrawals in a down market. The DOW is down almost 30% in the last month, as is the S&P 500. What that means is that to get a withdrawal of $10,000 will require a larger percentage of your nest egg than it would have a month ago. If you can leave your money in your fund, it’s value will likely recover over the next 6-12 months, based on past history. Taking the money out now makes that 30% loss permanent. That money, and the money that would have grown from it through compound interest will be permanently gone.

Now we know that some people need that money now, so what do you do?

Our advice is not to take large withdrawals. Things could suddenly change and the money you take out now might not be needed a month from now as the economy and your financial situation recovers. If you think you will need $10,000 over the next 3 months, take out $3000 now and $3000 later and more later only if needed. That could help limit your losses over the long run.

Also remember that if you take money out of your plan and put it back within 60 days, you don’t have to pay the taxes or the penalty on it as it will no longer count as a withdrawal.

Hopefully, in a few weeks this will all be behind us or at least we will be on the upswing. Until then, we here at AFS wish all of you the very best.