Can I Use Retirement Funds to Help Me During COVID-19?

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the $2 trillion stimulus package passed on March 27, included several provisions aimed to help businesses and individuals get access to cash or other relief measures, as well as expanded certain provisions in the first package Families First Coronavirus Response Act (FFCRA). 

While the bill covers a lot for small businesses, there are many provisions to help individuals too, including emergency sick leave, student loan relief, and penalty-free retirement distributions, which we’ll cover in this post. 

What are coronavirus-related retirement distributions and how do they work?

Through December 31, 2020, the CARES Act allows individuals affected by COVID-19 to make early withdrawals of up to $100,000 from their 401(k)s and individual retirement plans, without incurring a penalty (“coronavirus-related distributions”). Previously, individuals who withdrew from retirement accounts before the age of 59½ had to pay a 10% penalty on any amount they took out. 

Under CARES Act, individuals who seek the withdrawal must certify that they meet one or more of the following conditions to qualify for a coronavirus-related distribution: 

  1. They tested positive for coronavirus
  2. Their spouse or dependent tested positive for coronavirus
  3. They experienced negative financial consequences due to COVID-19 (i.e., being quarantined, furloughed, laid off, have hours reduced, or are unable to work due to lack of child care)

Are there tax implications to withdrawing from my 401(k) early?

After the distribution, the individual can either repay the withdrawal within three years (if they are still part of the plan and the plan allows them to do so) or, if the individual is not able to repay the distribution, they will have three years to pay the income tax on the distributed amount. 

What else should I consider?

Although the CARES Act removes the 10% penalty of early withdrawal, taking money out of retirement accounts early has an opportunity cost—every dollar an employee removes from their 401(k) or individual retirement account is a dollar that would not be growing for retirement. For those in need and who understand the tradeoffs of early withdrawal, however, 401(k) withdrawals can be one source of quick access to cash. 

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