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Business Owner Alert: Covid-19 Retirement Loans

(Tuesday, June 2, 2020, 9:07 p.m. EST) Business owners are in a tight spot: Federal tax rules have eased restrictions to allow those harmed by the epidemic to borrow from their IRA or federally qualified retirement plan; but without careful planning, business owners taking a loan from your retirement savings to support your business could land you in an even worse personal financial position if you are unable to repay it. . Here's what business owners facing challenges need to know now.

Emergency legislation passed on March 27, 2020 -- specifically, Section 2202 of the Coronavirus Aid, Relief & Economic Security (CARES) Act -- eased restrictions on borrowing from 401(k), 403(b) and other federally qualified retirement plans and IRAs. If you've been harmed by the Covid-19 epidemic, the maximum amount you can borrow was doubled to $100,000, and you will not face the usual 10% early-withdrawal penalty. 

IRAs and employer-sponsored retirement plans normally impose a 10% penalty on withdrawals made by individuals before age 59½. The CARES Act broadly waives the early withdrawal penalty for individuals hurt by the epidemic. The waiver is extended if you have been diagnosed with SARS-CoV-2 or Covid-19, or if your spouse or dependent is diagnosed with SARS-CoV-2 or Covid-19. Waiver of the early-withdrawal penalty is also extended if you experienced adverse financial consequences as a result of being quarantined, furloughed, or laid off or if your work hours were reduced, or you are unable to work due to lack of childcare.

The CARES Act gives you three years to pay back the loan, which must be made in 2020. Repayment must be completed over three installments in each of the next three tax-years, but you can pay it sooner. However, business owners, especially those nearing retirement, need to weigh the risk carefully.

Assets in your personal federally qualified plan or IRA are beyond the reach of business creditors. If your business fails and must file for bankruptcy, your creditors generally cannot lay claim to your personal retirement accounts. Forfeiting that protection from creditors by investing retirement dollars in your business when you are near retirement may not be worth the risk.

Taking a loan from your retirement savings to boost your business, under the new Coronavirus tax rules in the CARES Act, is not just a business decision. It's a family and financial planning decision.

Nothing contained herein is to be considered a solicitation or research material. It is subject to change without notice. Strategies referenced herein do not take into account your personal objectives, financial situation or particular needs of any specific person. The material represents an assessment of financial, economic and tax law at a specific point in time. The sources are thought to be reliable but could be wrong about important facts. 

The U.S. Government's response to the Coronavirus crisis implements new regulations and their precise impact may not be available at the time this was written or could be subject to change by U.S. Government agencies, such as the Internal Revenue Service or Small Business Administration.


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This article was written by a professional financial journalist for Pacific Financial Strategies Inc and is not intended as legal or investment advice.

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