Answering your questions about market volatility and retirement accounts
If you have investments and you faithfully contribute to your 401(k), you know (and expect) the markets will go up and down over time. It’s the nature of the beast.
But when the markets have bigger swings, it can make you a little uneasy. We understand that. Money and emotions are closely tied. Plus, you may be worried about job stability and looking to your retirement accounts for emergency cash.
We know you have questions. And while each person’s situation can be a little different, we want to help by answering some of most common ones we’ve heard from you.
During volatile times, it can be tempting to change how you invest in hopes of a better return. In the long run, you’re generally better off staying the course rather than trying to jump out of, then back into, the market. Read this case study about staying invested during market volatility.
Presidential election years often bring volatility because of the uncertainty, though in 17 of the last 19 elections, election year price returns for the S&P 500 Index were positive.1 Stick with a well-diversified portfolio focused on your long-term goals rather than on the near-term “noise” of an election. For more information read “November economic commentary: There’s more to watch than just the election”.
First, make sure your asset allocation continues to be in line with your long-term goals and risk tolerance. Saving for retirement generally requires you to trade near-term gains for what may be long-term benefits. Having a goal and sticking with it may help you keep perspective during ups and downs.
If your asset allocation is still aligned with your goals and your time horizon is longer than five years, then you likely don’t need to make changes and can ride out market volatility. If not, then realigning based on your goals, risk tolerance, and how long until you’ll need the money will help you achieve long-term success. Read more about asset allocation.
What’s best for you really depends on your goals, risk tolerance, and how long it will be before you need to withdraw the money. During volatile times, it can seem (really) appealing to change how you invest in hopes of a better return. Read our case study that shows how putting money in a CD vs. staying in the market played out five years after the Great Recession of 2008.2
You can always consult your financial professional about reallocating your investments to match your risk tolerance. (Our risk tolerance quiz (PDF) may be helpful, too.)
It’s good to know you have the right investment mix based on your comfort with risk and how long you have until you need your assets. Take this short quiz (PDF) to see if the risk level of your investments fits your investing profile. When you know how much risk you’re willing to take, you’ll better understand how much reward you could expect. A financial professional can help you, too. Read more about why investment risk matters.
401(k) and IRA withdrawals and loan questions
If you’re not permanently let go from your job, you may be eligible to take either a loan or another qualified plan withdrawal.* If you’ve lost your job, you may be eligible for withdrawals.* Each retirement plan is different, so log in to your account to see what’s available. If you have issues, our Participant Contact Center can help.
Tip: Looking for some emergency cash to get you through this hard time? Read “6 better options for emergency cash than an early 401(k) withdrawal.”
* If allowed by your plan.
Due to the CARES Act, you may be eligible for a penalty-free withdrawal from your retirement plan (if allowed in your plan) or individual retirement account (IRA) if you, your spouse, or a dependent is diagnosed with COVID-19 or you've experienced “adverse financial consequences” as a result of the pandemic.
You also qualify if you experience adverse financial consequences as a result of:
- having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19.
- your spouse or a member of your household being quarantined, furloughed or laid off, having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19.
- closing or reducing hours of a business owned or operated by your spouse or a member of your household due to COVID-19.
The CARES Act waives the 10% early withdrawal penalty on retirement account distributions. This applies to IRAs, 401(k)s, and certain qualified retirement plans and annuities.
The maximum you can withdraw collectively from your accounts is $100,000 in 2020, depending on what the plan allows. The usual mandatory 20% withholding for qualified plan distributions doesn't apply, but the income from these distributions would be subject to taxes over three years or one year, depending on what you decide. These distributions can be rolled over to a qualified plan or IRA within three years from the distribution.
Tip: Need cash to help you get through a transition period after being affected by COVID-19? Read “4 options to consider if you need emergency cash."
It depends on your retirement plan. If loans are allowed and your employer has agreed to it, the loan cap increases to $100,000 or 100% of your vested account balance, whichever is less. This is for loans taken within 180 days after the CARES Act was passed (March 27, 2020 – December 31, 2020). Log in to your account to see if your plan allows it and if you're eligible.
If you have an outstanding loan from your retirement plan with repayment due in 2020, the CARES Act allows you to delay your repayments for up to one year. Future payments will be adjusted to account for the delay.
The CARES Act waived 2020 RMDs. When you take an RMD, it’s taxable, so holding off is a way you may be able to reduce your income for 2020.
If you took your 2020 RMD dating back to January 2020, you had until August 31, 2020, to do a tax-free rollover of an RMD withdrawn from a defined contribution plan or IRA outside of the normal 60-day window.
For IRAs, this repayment won't count toward the one rollover per year rule (if repaid to the same IRA). Additionally, a non-spouse IRA beneficiary may do a tax-free rollover by repaying the RMD to the same IRA. The extension of the rollover deadline to August 31, 2020, may also apply to certain 2019 RMDs taken in 2020. Talk to a tax professional to find out what options you may have.
Annuity payments and withdrawal questions
Yes, you can stop those at any time and resume in the future if you'd like. We just need five days advance notice to stop a premium payment from coming out of your bank account.
We know how important this is to you. Our goal is that you have no interruptions in your payments. It’s possible that may change due to circumstances outside our control, so we’re recommending all our customers who receive payments via check to transition to direct deposit to avoid delays.
Yes, typically you can, but it depends on the type of annuity you own. Most of our deferred annuities offer a free surrender amount each year if you’re still within the surrender-charge period. And some of our income annuities allow for a one-time withdrawal in addition to income payments. Keep in mind that withdrawals from your retirement account can impact future earnings and future retirement savings.
Variable annuities can be more complex. If you’re receiving guaranteed lifetime income payments, an extra withdrawal can change future payments. Call us, or contact your financial professional, before taking a withdrawal from a fixed or variable annuity.
Maybe, depending on the type of annuity you own. The CARES Act waives the 10% early withdrawal penalty on retirement account distributions for "qualified individuals." This applies to IRAs and certain qualified retirement plans, including some annuities. The maximum you can withdraw collectively from your accounts is $100,000 in 2020.
Typically, a fixed deferred or variable annuity funded with qualified money would be eligible. However, there may be impacts to future payments or surrender charges that will still apply. Income annuities may only allow withdrawals in certain circumstances. It’s best to call us, or contact your financial professional to make sure you understand any contractual impact before taking a withdrawal.
If you’re experiencing hardship, call us at 800-852-4450 to discuss your options.
1 Bloomberg, Principal Global Asset Allocation. Data as of June 20, 2000.
2 Example for illustrative purposes. Returns related to a 2% interest-bearing CD. Market returns based on S&P index returns as of December 31, 2008 through December 31, 2013. Past performance does not guarantee future results.
Investing involves risk, including possible loss of principal.
Asset allocation and diversification do not ensure a profit or protect against a loss.
Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options.
Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
Insurance products and plan administrative services provided through Principal Life Insurance Co. Securities offered through Principal Securities, Inc., 800-547-7754, member SIPC. Principal Life and Principal Securities are members of Principal Financial Group®, Des Moines, IA 50392.