The “Coronavirus Aid, Relief, and Economic Security Act,” also known as the “CARES Act,” was passed by Congress on March 27, 2020. This economic stimulus package will likely have an impact on your retirement strategy if you have a 401(k) or an IRA, and you might need to make some important decisions soon. To assess the CARES Act’s effects and make those decisions with confidence, you need accurate information.
The CARES Act and 401(k) Plans in the US
Retirement accounts are impacted by the CARES Act, which reduces some early withdrawal fees for those who are subject to COVID-19. Employees with 401(k)s who have the coronavirus will also have easier access to their funds earlier and be able to borrow larger sums. Last but not least, those who have already taken out loans against their 401(k) accounts will be given more time to pay them back.
Who Does the CARES Act Cover?
Your 401(k) or IRA transaction qualifies as “coronavirus-related” under the CARES Act if it occurs between March 27, 2020, and December 31, 2020, and one or more of the following conditions hold true:
Anyone who tests positive counts as being coronavirus affected. Marc Lipsitch, a Harvard University epidemiologist, asserts that 40% to 70% of the world’s population could get infected. Dr. Brian Monahan, the attending physician of Congress and the U.S. Supreme Court, said he expects 70 million to 150 million people in the U.S. will become infected with COVID-19. The odds of testing positive, once testing rolls out in a big way, are relatively high. Even if you, like most people, only experience mild symptoms.
There is a good chance that your bank account won’t be affected by the virus itself if you are fortunate enough to avoid it. Whether you work for a living or are self-employed, your income could suffer. Your costs could significantly increase, for instance, if you suddenly need to pay for child care due to school closings.
You May Qualify Under Other Disaster Relief Laws
You may be eligible for benefits under other disaster relief provisions even if you do not meet the criteria for a citizen who has been infected by the coronavirus. A federal COVID-19 disaster relief declaration is in effect for numerous areas throughout the United States.
RULE 1: PENALTY-FREE WITHDRAWALS FROM IRAS AND 401(K)S
The CARES Act eliminates the 10% penalty for early withdrawals from 401(k) and IRA accounts if the withdrawals meet the criteria for coronavirus distributions. You will be able to access your 401(k) funds without incurring penalties if you meet the requirements of the stimulus package (see above) and your employer allows hardship withdrawals. Your employer won’t be required to deduct 20% of the proceeds because the IRS won’t view this distribution as a rollover, either.
According to the CARES Act, all your employer requires of you is a certification that you satisfy one or more of the aforementioned eligibility requirements. You can make a withdrawal under the Act without anyone having access to your finances or looking over your personal health information.
RULE 2: YOU CAN SPREAD TAXABLE INCOME FROM DISTRIBUTIONS OVER 3 YEARS
If you take a coronavirus withdrawal from a retirement account in 2020, you gain the following two benefits:
Before making a withdrawal, confirm that your plan enables you to access your 401(k) early for hardship withdrawals.
RULE 3: ADDITIONAL TIME TO REPAY 401(K) LOANS
If you already have a 401(k) loan, you typically have up to five years to pay it off before the balance is considered a taxable distribution and may be subject to an early withdrawal penalty. The CARES Act won’t change that five-year deadline, but if you meet the requirements, you may be able to postpone for one year the payments that would otherwise be due on that loan from March 27, 2020, to December 31, 2020. However, interest will continue to accrue. In order to cover the additional interest and ensure that you repay your loan within the five-year term, your employer might need to increase your payments in the future.
If you have a loan against your 401(k) and were required to repay it in full by December 31, 2020, you have an additional year to do so. However, what if your loan is due and payable because you have left your employer?
It is your responsibility to let your employer know if any of these rules apply to you.
RULE 4: 401(K) BORROWING LIMIT DOUBLED
Employees with loan-allowing 401(k) plans can borrow twice as much as they could in the past. This indicates that they may borrow up to $100,000 or 100% of the balance of their account, whichever is less. That is twice the previous cap of $50,000 or 50% of your balance, whichever is less.
According to the CARES Act, you have 180 days starting on March 27, 2020 to borrow money from your 401(k). Additionally, you’ll need your employer’s confirmation that you qualify for the loan under the CARES Act.
RULE 5: IRS NOT REQUIRING RETIREES TO TAKE MINIMUM DISTRIBUTIONS
Typically, the IRS mandates that retirees in their 70s take money out of tax-deferred accounts like 401(k)s and IRAs. And these distributions are taxable. Due to the COVID-19 pandemic, which has caused many of these balances to decrease, the CARES Act waives these regulations starting in 2020. The option for account holders is to forego the withdrawal and wait for their balances to recoup from the pandemic.
Your Employer May Not Allow 401(k) Loans or Withdrawals
The CARES Act does not require employers to provide more generous loans or permit hardship withdrawals. You must read the fine print of your plan because the majority of these changes primarily impact the Internal Revenue Code and not labor laws. The CARES Act permits your employer to give its workers this relief even if its 401(k) plan doesn’t currently permit hardship withdrawals or loans. It must then formally amend its rules within two years. Your employer might decide to make your life a little bit easier if you and enough other employees speak up.
COVID Retirement Loans and Withdrawals: Should You Take Them?
You shouldn’t always do something just because you can. If you’re out of work, out of credit, and out of money, having the ability to withdraw money from retirement accounts early could save your life. You might be able to lower your payments on things like high-interest credit cards by borrowing money from your 401(k). You might be able to avoid foreclosure or prioritize your family’s health by spending more time at home and taking on fewer jobs.
However, using retirement funds to get through the COVID crisis might not be the best course of action:
If you must borrow against or withdraw from your retirement, do so as little as possible to minimize the long-term harm to your financial security.
Alternatives to Raiding Your Retirement
Use your emergency savings if you have them if you do. While the virus infects the nation and the economy, learn to survive on less.
Ask for help if you need it.
If you are fortunate enough to have a job and are worried about having enough money for emergencies, plan ahead. Save for emergencies on your own, and consider other options. You only pay interest if you use credit lines or credit cards (only for emergencies), so those may be wise choices.
If you have good credit and steady employment, you might be able to use a personal loan to supplement your emergency fund. Or, take out a credit line secured by the equity in your home, which you will only use as needed. Home equity conversion mortgages, also known as FHA reverse mortgages or HECMs, may be available to homeowners 62 and older who have significant home equity and could provide them with cash even with low income and questionable credit.
One benefit of the stimulus package is the possibility of early 401(k) withdrawals. Before exercising that option, carefully weigh your options to ensure that it is appropriate for both your present situation and future circumstances.
CNBC. “Up to 150 million Americans are expected to contract the coronavirus, congressional doctor says.” Accessed March 28, 2020.
IRS.gov. “Disaster Relief Bill Includes Retirement Plan Distribution and Loan Options.” Accessed March 29, 2020.
World Health Organization. “Naming the coronavirus disease (COVID-19) and the virus that causes it.” Accessed March 30, 2020.
Gina Pogol contributes to several national publications with articles on personal finance and mortgages. Pogol has more than 20 years of experience and is a certified Nevada mortgage lender (license number 963502). Gina has worked as a systems consultant for Experian, a tax accountant for Deloitte, and an estate planning and bankruptcy paralegal. She is a well-rounded business professional. She loves teaching and empowering consumers. Company.
Can I borrow from my 401k under the CARES Act?
Rule 4: Doubling of the 401(k) borrowing limit entitles borrowers to borrow up to $100,000 or the amount of their account balance, whichever is less. That is twice the previous cap of $50,000 or 50% of your balance, whichever is less. According to the CARES Act, you have 180 days starting on March 27, 2020 to borrow money from your 401(k).
Can you still take a Covid withdrawal from 401k in 2022?
If the need for the distribution is related to COVID-19, you are allowed to withdraw up to $100,000 from an individual retirement account (IRA) or employer plan like a 401(k) or 403(b). With this modification, a new coronavirus rule is added to the 401(k) hardship withdrawal rules.
Who qualifies for Section 2202 of the CARES Act?
281 (2020) (CARES Act) for eligible retirement plans and qualified individuals The CARES Act was enacted on March 27, 2020. Qualified individuals receive advantageous tax treatment with regard to distributions from eligible retirement plans that are coronavirus-related distributions under section 2202 of the CARES Act.
Is there a penalty for 401k withdrawal during Covid?
Additionally, if they withdrew the funds prior to turning 59 12, it would be considered an early distribution and would incur a 10% additional tax penalty. However, if you withdrew the funds as a result of COVID-19, you are not required to pay taxes on all of them this year. Instead you can spread it out evenly over 3 years.