Emergency Solutions in a Pandemic

As we enter the last month of this insane year, more and more people are finding themselves in dire economic straits.  With increased testing throughout the country, the number of positive tests is exploding.  This, in turn, is resulting in some states resorting to more restrictive lockdowns.  Of course, one of the unfortunate effects of lockdowns is the economic upheaval occurring in some lives.

I am keenly aware of these issues.  I have been using Google Ad Words this year to promote my business.  While I have not seen great success with it, as of yet, I have seen marked traffic from people searching for help.   For whatever reasons, the marketing program has generated hundreds of people contacting me by phone and email looking to borrow from their retirement plans.

It is agonizing to hear about these sad situations, so I offer some of the following ideas to consider:

  • CARES Act Distribution and Borrowing Options

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020 provides some relief in the form of favorable distribution and loan options.  This includes the ability to borrow up to $100,000 from IRAs, 401(k), and 403 (b) plans.

The first step would be to determine if you are qualified.  You are a qualified individual if –

  • You are diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;
  • Your spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
  • You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;
  • You experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or
  • You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

For your employer sponsored retirement plan you will need to confirm that they have adopted the rules for distributions and/or loans.  Additional FAQ’s can be found here IRS Guidance

So, just because you can, should you take a loan or distribution? It is entirely dependent on each individual’s situation.  These funds are meant for the long-term goal of retirement.  Taking a distribution may impact your ability to retire.  That matters little if it is becoming increasingly difficult to put food on the table.

  • Economic Impact Payment

If you did not receive a payment or did not receive the full payment, it is still not too late.  Check your status here:  Economic Impact Payment

  • Home Equity Line of Credit (HELOC) or Home Equity Loan (HELOAN)

If you have equity in your house, a HELOC or HELOAN may be a great way to gain access to much needed funds.  Depending on how you use the funds, they may be eligible to be tax deductible.  The interest rates are generally relatively low, especially compared to credit cards.

WARNING: Do everything you can not to tap credit cards for this emergency money.  It can rapidly escalate out of control.  I am also opposed to using credit cards in these circumstances, so I do not include them here as a solution.

  • Using Brokerage Account Margin Feature

If you do not understand what margin in a brokerage is, it is best to spend some time educating yourself.  Basically, margin is using the value of your portfolio for leverage.  Well-seasoned investors use this to increase the value of the portfolio by effectively using margin buying power.

These “self-loans” are paid to the brokerage firm based on their established margin rates.  These are negotiable, especially for affluent investors.

Borrowing against your margin account is not a standard recommendation, but in the case of an emergency, it is a quick method to get cash.  You will need to ensure this feature is turned on for your brokerage account. You may need to fill out an additional account form.

Be forewarned, that depending on your holdings and market conditions, you could be faced with margin calls that force liquidations.  It should not be undertaken lightly.

While the above ideas are not ideal and do not apply to everyone, I hope they provide some help for people in need.

To learn how an independent, fee only advisor and a CERTIFIED FINANCIAL PLANNER™ professional can help you, please contact me.  Feel free to share with others and make suggestions for future articles: peter.oneill@fiduciamwealth.com