You may have heard the news that there have been 3 million applications for SBA loans through the recent CARES Act, to the point that the act has reached its funding limit of $349 billion. As a business owner who may have applied for the $10,000 EIDL grant only to later find it is actually $1,000 per employee, or a PPP loan that didn’t get funded before the money ran out, you may be wondering what else is possible.
If you’re starting to feel overwhelmed or discouraged, listen up! I’ve got an idea for you if you have a retirement account you’ve been saving, whether for retirement or a rainy day. Well, it’s raining, and it may be the time to use that retirement money to fund your future, now.
Did you know that the CARES Act has amended normal rules for withdrawing money from qualified retirement accounts?
Normally, if you were to withdraw money from your retirement account before retirement age (generally 59 1/2 years old), you’d have to pay it back within 90 days. Otherwise, you would be penalized with a 10% fee as well as have your withdrawal taxed.
Now, in 2020, the CARES Act has modified those rules in order to support people whose personal and business finances have been impacted by COVID-19, which is everyone. And you may be able to use that modification to keep your business alive, even if you don’t get PPP or EIDL loan money.
The act specifies that the new 2020 rules give you three years to pay back the loan from your retirement plan (without penalty or taxes) rather than the normal 90 days. The retirement accounts you can withdraw from include traditional individual retirement accounts (IRAs), 401(k)s, and 403(b) plans. The waiver applies to coronavirus-related distributions made between January 1, 2020, and December 31, 2020.
To be completely clear, the law says that the withdrawals do have to be related to COVID-19. This explicitly includes “closing or reducing hours of a business owned or operated by [an] individual due to COVID-19.” So if you have, by law, had to close down your business completely, stop in-person business and make a major (perhaps costly) switch to conducting business virtually, or reduce hours for any other reason, you’re eligible. It also applies to people who have had their work hours reduced, which can be especially relevant if you are an independent contractor.
If you are eligible, you can take out up to a total of $100,000 or 100% of the qualified retirement account (whichever comes first). You can pay back the funds to that retirement plan over a three-year period, beginning the day after the date you receive your first coronavirus-related distribution. The amount of money that you pay back for the loan over that period of time will not be recognized as income to be taxed. However, income taxes will be owed on the amounts you withdraw if you don’t repay them in that three-year period and the 10% penalty will also be applied.
Because this amount will ultimately have to be either repaid or taxed, it’s important to think this option over very carefully. But if you aren’t getting anywhere with the SBA loans, it could be a really helpful alternative to high interest loans.
Now might also be a good time to take your money out of your retirement account and invest it in yourself, rather than keep it in something extremely volatile and outside your control. Yes, I’m referring to the stock market, and next week we’ll talk more about that. I’ll go into more detail about how now may also be the time to look into a Self-Directed IRA, or a retirement account in which you control all the investments rather than having them controlled by a broker or a robo-advisor.
As your Creative Business Lawyer®, we can help you evaluate whether using some or all of your retirement account now is a good choice for you and your business.
This article is a service of Bob Prousalis of P&P Law, Creative Business Lawyer®. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.