401k Early Withdrawals & the CARES Act
I am out of work and out of money – Can I take money out of my 401(k)?
The coronavirus pandemic has created a number of hardships especially for those in businesses that rely upon personal contact with people. If you have a 401(k), and you have experienced one of the specific impacts by the coronavirus noted below, you may be able to use distributions from your 401(k) to help you through these difficult times.
This is possible through the recently passed CARES Act.
This act allows employees to gain access to retirement funds without some of the negative tax consequences that would otherwise be in place. You have to be a qualified individual in order to take these distributions, but many will certainly qualify. You can take up to $100,000 out of your which might just be enough to get you through this crisis.
Here is a summary of the qualified individuals who can tap their 401(k) for help:
You have been diagnosed with SARS-CoV-2 or COVID-19; or
You have a spouse or dependent who has been diagnosed with SARS-CoV-2 or COVID-19; or
You have been financially harmed (adverse financial consequences) due to being quarantined, furloughed, laid off, having work hours reduced, or you are unable to work as a result of lack of childcare due to SARS-CoV-2 or COVID-19. Also, if you own or operate a business and it is being closed or has closed or had reduced hours due to SARS-CoV-2 or COVID-19, you may qualify.
The Secretary of the Treasury may use some added factors.
Number 3 is going to permit many people who do not have the virus to obtain relief from their 401(k). While you cannot lie about being impacted, plan administrators can rely on the employee’s own self certification that he/she meets the definition of a qualified individual.
So what are the benefits?
First, there is no automatic 20% withholding on the distribution for federal income tax purposes as long as it is a coronavirus-related distribution. You will pay taxes on the money, but you may have up to three (3) years to do that.
Second, there is no 10% early withdrawal penalty if you are under 59 ½, again as long as you are a qualified individual.
Third, at any time during the three-year period, you may repay the distribution to the plan as long as it is a plan that accepts rollover contributions and those repayments will not count toward the annual limit of contributions toward a 401(k). For example, if you repay $20,000, and you want to also make contributions up to the individual limit of $24,000, you can do so. The added distributions are to be treated as a tax-free rollover and you will not owe taxes on the amount repaid. Nice!
The act also increases the amount that you can take out as a loan if you are a qualified individual, and if your plan is one which permits loans. If your plan does not permit loans, then this does not apply to you unless your plan administrator or employer amends the plan to permit that. The loan benefit is for the timeframe of March 27, 2020, and September 23, 2020. The higher loan limit, the lesser of $100,000 and 100% of the vested plan account. Some 401(k) plans have gradual vesting, and others vest immediately with each contribution. You will have to check your plan to know your maximum limit. The normal loan limit is the lesser of $50,000 and 50% of the vested plan account.
Another benefit of this loan is that you can delay any repayment for one year. Interest will continue to accrue for as long as you delay, but that timeframe will not count toward the five-year maximum term that applies to plan loans other than home loans.
The act also has a temporary waiver provision for certain required minimum distributions during 2020 for defined contribution plans, which includes 401(k)s. If you were 70 ½ in 2019 and you are already receiving a required minimum distribution, you are not included in this. There is some loosening of the requirements as to rolling over required minimum distributions into an IRA the plan allows such a rollover. You should seek specific advice before making taking advantage of this provision.