SAVANNAH, Ga., – Three hundred and thirty five pages of dense legal language is keeping tax attorneys, accountants and other professionals extremely busy these days. One obscure provision is located on page 62, under the title Special Rules for use of Retirement Plans. The document notes an increase in 401k loan provisions to $100,000 and this could be an attractive option for some at this time. So the question becomes…do you qualify?
The first question I would ask you in regards to your qualification would be does your company’s plan permit loans or not? If so, then the 2nd set of obstacles are in the legislation. The relief only applies to a “qualified individual,” which means an individual who is diagnosed with COVID-19 (with a CDC-approved test) or an individual whose spouse or dependent is diagnosed with COVID-19, also with a CDC-approved test. Additional qualifying individuals include someone who experiences the below:
- Adverse financial consequences as a result of being quarantined, furloughed, laid off
- Having work hours reduced
- Being unable to work due to lack of child care due to COVID-19
- Closing or reducing hours of a business owned or operated by the individual due to COVID-19
- Other factors as determined by the Treasury Secretary
Most of the other existing provisions remain such as 5 year term unless used to purchase a principal residence (then 15 or 30 years), Prime + 1% or CD rate, and + 2% determined on the day of origination.
Other items to note include that the loan must be originated by September 23, 2020 and that no payments are due until January 2021. It is important to note that not everything Congress gives out is free and the payments not made will be added to the term of the loan.
Typically, this type of loan is only taken in extreme cases. However, our new normal may make these attractive to some who would have never considered them in the past. Investing in your business or real estate where your expected return is more than the loan costs could be an attractive use of this provision. Currently, several of my own clients are considering this loan to finance either inventory in their business or other uses to expand. Generally, the application process is easier and the cost is lower which can be attractive in some situations. But you will pay interest that goes back into your account and will be taxable when withdrawn at a later date.
The key is to make the best financial decision that will benefit you, your family, or your business not only now but in the future. By reading the fine line, you might be able to set aside some additional funding that will benefit you all in the long run.
Rick Wright is the co-author of Retire Abundantly, creator of Retire the Wright Way, and founder/owner of Coastal Tax Centers, RL Wright & Associates, and Wright Advisory Group. Rick can be reached at [email protected].