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Get Your Retirement Plan Back on Track

Investors engaged in a test of wills with the stock market during sharp declines – a test that some failed. They panicked and sold their stock holdings, only to see the market bounce back, explains Sandra Block, Kiplingers Personal Finance.

Don’t compound the damage by trying to figure out the optimal time to rebuild your stock portfolio. “A lot of times people say, ‘I’m going to wait until the dust settles,’ ” says Vinicius Hiratuka, a CFP in Madison, Mississippi. “The stock market is a leading indicator. When the dust has settled, you’ve missed it.”

Still, reentering the market will require fortitude because the stock market will likely continue to be volatile. Consider taking emotion out of the equation by dollar-cost averaging your way to your target allocation of stocks, bonds and cash. If you sold $100,000 in stock funds, you might reinvest $25,000 on a specific day each month for four months. Over the long term, the day you invest won’t matter much. What will matter is that you invested.

Also use your reaction to the recent market swings as a barometer of your tolerance for risk, says Marcel Winger, a CFP in San Antonio. Keep in mind, though, that if you decide to dial down your allocation to stocks, you’ll also give up long-term returns. That’s particularly the case now, when low interest rates have depressed returns from bonds and cash. A financial planner can help you come up with an asset allocation that matches your risk tolerance but still provides sufficient long-term returns.

Selling stocks in a downturn may be a temporary setback, but taking a withdrawal from your retirement plan could put a permanent dent in your portfolio. If you’re younger than 59 1/2, you’ll usually pay a 10% penalty, plus income taxes on the amount you take out. But if you’re among the millions of people who were laid off or furloughed in recent months, you may have had no choice.

But the Coronavirus Aid, Relief and Economic Security (CARES) Act signed into law in March provides an opportunity to repair some of the damage. If you or someone in your family was diagnosed with COVID-19 or suffered adverse financial consequences because of the pandemic, you can withdraw up to $100,000 from your 401(k) (or other employer-sponsored retirement plan) or IRA without triggering an early-withdrawal penalty.

You’ll have up to three years to pay taxes on the withdrawal. And as long as your employer allows it, you’ll have up to three years to roll the money back into your plan.

If you took a 401(k) loan (or are considering one) instead of a withdrawal, you also have new options. In addition to increasing the maximum you can borrow from $50,000 to $100,000, the CARES Act allows borrowers to skip making payments in 2020 – giving you six years to pay it off instead of five.

Editor’s Note: Sandra Block is a senior editor at Kiplinger’s Personal Finance magazine, www.Kiplinger.com.

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