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The CARES Act: Should I Take a Penalty Free Withdrawal or Loan from my 401K?

The CARES Act: Should I Take a Penalty Free Withdrawal or Loan from my 401K?

April 01, 2020

While many are focusing on The CARES Act’s one-time relief payment of $1,200 or $2,400 (plus $500 for each qualified child), 401K/403B/457 participants and IRA owners may wish to focus on the provisions which loosen access to retirement plan funds for individuals. 

Typically, if an individual takes a withdrawal from their 401K/403B/457 or IRA, the funds would potentially be subject to a 10% penalty for early withdrawals and in a 401K/403B/457 plan, 20% mandatory withholding for federal taxes.

The CARES Act allows 401K/403B/457 participants and IRA owners who have been affected by COVID-19 (which casts a wide net), the ability to take a penalty-free early withdrawal of up to $100K total from either their 401K/403B/457 or IRA, or a combination of both. 

Those funds would still be treated as taxable income, but taxes can be stretched over three years - easing the annual tax burden and possibly reducing the possibility of bouncing into a higher tax bracket.

Participants may also payback their withdrawals (flexibly) to the plan within three years from the day after they received the withdrawal. The optional repayments would be treated as rollovers into the plan and give participants a wide variety of options - such as lump-sum repayment or a series of payments over the three years if the individual has the financial ability to level up.

The CARES Act has also increased the maximum 401K/403B/457 loan limit to $100K from $50K.  If the participant has an existing loan, repayment may be delayed for up to a year, but interest does continue to accrue.

While these provisions may provide additional relief, utilizing them should be considered as a last resort. Participants should reach out to their financial advisor for a more customized, in-depth solution.

Also an important caveat: Employers, or plan sponsors, are not required to implement the provisions of The CARES Act.  Consult with your Employer to find out whether your plan will make these provisions available.