CARES Act Liberalizes 401(k) Withdrawals

Provisions for loans or withdrawals from 401(k) plans have been relaxed for 2020.

You can now borrow up to $100,000 or 100% of your balance and pay it back over time. Previously you could borrow $50,000 or 50% of your balance. And now you can suspend payments for 2020. You will still pay interest on the loan (to your account), and that interest is not tax deductible. But as an emergency loan, it’s not all bad.

Additionally, you can withdraw from your account up to $100,000 without the 10% penalty for premature withdrawal, or the 20% withholding. It’s still ordinary income to you, but you can take up to 3 years to pay the tax.  However, you must specify that you are impacted by COVID-19 as follows:

  • You, your spouse or dependent has been diagnosed with the coronavirus.
  • You’ve experienced adverse financial consequences as a result of being quarantined, furloughed or laid off, or your work hours have been reduced.
  • You’re unable to work because of a lack of child care.
  • You’ve had to close or reduce the hours of a business as a result of the virus.
  • You’ve been financially impacted by other factors determined by the treasury secretary.

Ah, but should you?

In general you should treat your 401(k), IRA or other defined contribution plan like sacred funds. Any withdrawal or loan cannibalizes your future retirement security. It’s a shame to give up tax deferred compound growth. For instance, $10,000 withdrawn today from your plan might have grown to $54,274 in 25 years at a reasonable 7%. Ouch, that will hurt at retirement time!

But, in the real world, stuff happens. It goes without saying that before I let my firstborn child starve, I would take the money.

Millions of people are out of work through no fault of their own. They are hurting. This disaster will hopefully be short lived, but in the meantime it’s a disaster of biblical proportions. Consider other sources of funds first. But, as a last resort the government has given you some very limited relief. Use it if you need to.

 

 

 

By | 2020-04-20T17:50:15+00:00 April 20th, 2020|Blog|

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