Finding Funds to Help Your Family During COVID-19
Writing a blog in this environment is pretty challenging. It's hard to find content that hits to the heart of what people are experiencing, and it's hard to provide advice about the future when we're all just getting by in the moment. So I wanted to target this post towards people who are struggling to figure out what's next in their financial future. In particular, this post focuses on people who are experiencing reduced pay, furlough, or unemployment. In this first part, we'll focus on resources and sources of income presented in the CARES Act. In my next post, on slate for next week, I'll go over managing your cash flow and prioritizing your expenses.
Payroll Protection Program
If you are self-employed or work for a small business, you may have heard of the Payroll Protection Program. Passed in the CARES Act at the end of March, this loan program is designed to help small businesses continue paying employees (as well as independent contractors). You can also borrow funds to cover operating expenses like rent and utilities for two-and-a-half months. The loan terms are really favorable: 1% interest rate, two-year loan term, and 6-month payment deferral. The best part? If you do not reduce compensation for your business, meaning you keep your employees on payroll, this loan is forgivable. You can complete an application and submit it to your local bank for processing. So far, this program has been really popular. In fact, funds were recently depleted, prompting Congress to pass legislation for additional funding. If you qualify for this program, I recommend moving on your application very quickly.
If you were laid off, are self-employed, or--depending on your state--experienced reduced hours, you may be able to apply for unemployment benefits. The CARES Act added $600 of weekly pay to state-provided benefits. This additional funding means that you may actually make more from unemployment than you earned while working. Additionally, the CARES Act waived the one-week elimination period and the requirements to show you're actively looking for work. Benefits are extended to self-employed people. Given the historic unemployment reported in the past three weeks, applying for unemployment can be difficult due to high demand. You can find information about applying for unemployment benefits in Texas here.
Both programs, even with the added benefit of the CARES Act, are experiencing incredibly high demand and long wait times for processing. This leaves some folks feeling uncertain they will receive these benefits in a timely fashion.
Beginning the week of April 13 (side brag: my birthday), people have begun receiving federal stimulus checks. For individuals with adjusted gross income under $75k ($150k if you're married), you are eligible to receive $1200 per person. You're also eligible to receive a $500 payment for each child under age 17. College students with income in a previous year will also receive a $1200 check, even if their parents claim them as a dependent. The IRS is using your most recently filed tax return to determine eligibility, even if your 2020 income changes your eligibility. This may mean that some people experiencing job loss due to COVID-19 will not receive a stimulus check, because their income was higher in 2018 or 2019. If you fall into this category, you can expect an additional refund when you file your taxes. Likewise, some people may receive a stimulus check who are making bank on their mask manufacturing business in 2020. If this is you, you may or may not have to pay back the stimulus funding when you file your 2020 taxes. If you did not file a tax return, you can apply for the stimulus check as a non-filer.
Dipping Into Savings
You've heard the statistic: 40% of Americans cannot cover a $400 emergency expense. Wealth inequality in the US means that this recommendation is either entirely plausible or completely insane, depending on your class.
Cash savings cam help you pay the bills in an emergency when you are unable to work. This might happen due to a medical event, a disability, or an unexpected job loss. This money can also help you pay higher-than-budgeted expenses. Having some extra money set aside can prevent you from relying on expensive consumer debt, like credit cards.
In general, I recommend keeping three to six months of your living expenses in emergency savings. Keep three months if there is another income supporting your household. Keep six months if you're single, the primary breadwinner, or if it would take a long time to replace your source of income.
Dipping Into Retirement
If you don't have cash savings you can rely on, you may have retirement savings--either in an IRA or employer plan--that you can access. In most other circumstances, I do not recommend tapping into retirement savings. Accessing these funds before retirement usually means you have to pay taxes on the funds you take out, plus an additional 10% penalty. The tax consequences usually mean that this is the last place we leave to look for funds.
However, the CARES Act allows you to dip into retirement savings if you have been affected by COVID-19. You can take a distribution of $100,000 from an IRA without the 10% penalty. At your discretion, you can also spread out the income taxation for up to three years. For employer-provided plans, like 401(k) accounts, you can waive the 20% mandatory tax withholding on the distribution. You have the option to replenish the distributed funds over three years, which would avoid income taxation altogether.
There's some additional tax planning implications to consider. You'll want to evaluate your income in 2020 compared with your expectations of income in subsequent years to make a decision about paying taxes all at once in a low income year, over three years, or not at all by replacing the funds you withdrew.
It might be unfavorable to sell some investments in your retirement accounts as markets have experienced a downturn since February. Last, borrowing money from yourself set aside for retirement presents certain risks. Americans are already pretty lousy at saving for retirement, so making sure that you add more future retirement savings is an important consideration as well.
All in all, this pandemic has generated a lot of uncertainty about what our future looks like, from our identity towards work, to our social lives, and our own safety and wellness. Financial uncertainty can lead to panic and the desire to find some semblance of control. There are resources available to help you add income or cash to your household to get through these difficult times.
In my next post, I'll discuss how effectively prioritize your expenses to stretch your dollars even farther. Check back next week.