CARES Act: You Can Now Withdraw Up to $100,000 From Your Retirement Plan, But Should You?

Brian A Boyd, ChFC®, CFP®

April 14, 2020

On March 27, 2020, President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act. Amidst the global COVID-19 pandemic, this act is designed to bring economic relief to individuals and businesses who’ve been affected by the resulting economic downturn.

Section 2202 of the act, titled “Special Rules For Use of Retirement Funds,” now allows those affected by COVID-19 to withdraw up to $100,000 penalty-free from their 401(k) or IRA.1 In our previous post, we summarized the key provisions for 401(k) plan sponsors. Here we’ll address the considerations for anyone that may need access to their retirement plan assets.

What does it mean to be "impacted by COVID-19?" Congress defines this broadly to include those who:

Have been diagnosed with COVID-19;
Have a spouse or dependent who has been diagnosed with COVID-19;
Experience adverse financial consequences as a result of being quarantined, furloughed, being laid off, or having work hours reduced because of the disease;
Are unable to work because they lack childcare as a result of the disease;
Own a business that has closed or operate under reduced hours because of the disease; or
Meet some other reason that the IRS decides to say it is OK.

This new option to withdraw from your 401(k) or IRA is on the table, but should you consider taking it?

Penalty-Free Access to Retirement Savings

Traditionally, there has been a 10 percent penalty for withdrawing funds from a 401(k) or IRA account before reaching the age of 59 ½. But through changes passed in the CARES Act, this penalty will be waived for individuals who choose to tap into their retirement savings accounts and withdraw up to $100,000 to cover financial burdens caused by the COVID-19 pandemic.1

If you choose to withdraw, you will have the option to spread the tax liability of this additional income over the next three years, and you will have three years to return savings (up to the full amount withdrawn) back into the account.1

Increase in 401(k) Loan Limits

Aside from withdrawing altogether from your retirement savings account, some plan sponsors offer the option of taking a loan on your 401(k) or IRA. In the past, there have been limits on how much you can withdraw. According to the IRS, the maximum amount was previously “(1) the greater of $10,000 or 50% of your vested account balance, or (2) $50,000, whichever is less.”2

In light of recent events, the CARES Act has adjusted this loan limit to a maximum amount of 100 percent of your vested account balance, or $100,000, whichever is less.1 This option will be available for individuals for 180 days after the CARES Act is enacted. Additionally, anyone owing a 401(k) loan repayment before December 31, 2020, can delay their repayment for up to one year.1

While the amount one can withdraw in a loan has doubled, it’s important to remember the IRS has not changed its rules on loan repayment. According to the IRS, “Repayment of the loan must occur within 5 years, and payments must be made in substantially equal payments that include principal and interest and that are paid at least quarterly.”2 That means that if you choose to take this option, you need to be prepared to pay the full amount back in substantial installments each year.

Considerations About Withdrawing From Your Retirement Savings

As is true for any other circumstance, the decision to withdraw from your retirement savings account early should never be taken lightly.

With account values depressed due to recent market volatility, now is likely an inopportune time to take a withdrawal. In addition, it's important to consider the long-term impact of removing these funds from your plan, including future compound interest, especially if you're unable to pay it back.

As you address the need for money now, remember to consider your need for money in the future. If you're experiencing economic stress due to the coronavirus outbreak, then consider these steps first.

Step One: Use your emergency fund. This is the type of thing you've been preparing for.

Step Two: Consider temporarily reducing or suspending contributions to your retirement plan. Perhaps the extra take-home pay will be enough to bridge the gap.

Step Three: Consider whether other assistance offered through the CARES Act, such as individual/family stimulus checks, Emergency Disaster Relief Loan, or Paycheck Protection Plan will provide adequate emergency liquidity for you.

Step Four: Are there any other inexpensive sources of funds such as a Home Equity Line of Credit (HELOC)?

Step Five: If taking emergency cash from your retirement plan is the last option, then try to withdraw only what you estimate you'll need immediately.

Before making a big financial decision like this, it’s important to work together with your financial advisor and/or accountant.

It's also important to note that not all 401(k) plans allow for hardship withdrawals or loans. Plans without these provisions may choose to adopt them, but there is no requirement to do so.

We know these are tough times and we're here to help. Please reach out if we can be of any assistance.

Brian