Why financial planning is essential if you want to help your friends and family get by during COVID-19

Helping family financially during the coronavirus pandemic is an admirable thing to do. Before making that decision, though, it’s important to think through your options carefully and understand the tax implications of any gifts. In 2020, you can gift up to $15,000 free of tax to an unlimited number of recipients. A gift of more than $15,000 doesn’t necessarily mean that you will owe taxes.

As the COVID-19 pandemic continues to send shockwaves through the economy, millions of people are facing financial distress. Some are turning to family members for financial help, and some are seeking government assistance. To help struggling Americans, the Coronavirus Aid, Relief, and Economic Security (CARES) Act allows penalty-free withdrawals of up to $100,000 from 401(k) accounts.

This may be a viable way to make ends meet, but it should be a last resort for people strapped for cash. While the CARES Act removes the 10% penalty, the distribution is still subject to income tax. The more significant expenses, though, might be the missed opportunity of tax-deferred growth in a tax-advantaged account and the forced sale of long-term investments in a bear market — especially because stock market returns following a bear market tend to be robust. Ultimately, early withdrawal can put retirement, a critical financial goal, in jeopardy.

If you are financially stable but have loved ones dealing with financial difficulties, you may consider offering them support so they can avoid tapping into their retirement money early. Helping family members financially can be a great option, but it’s something you should consider carefully.

Read the full article at Born2Invest.