You Can Now Get $100k Penalty Free From Your 401k or IRA. Is It Smart?

Section 2202 of the newly enacted CARES 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

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

Have received a COVID-19 diagnosis;
Have a spouse or dependent who has received a COVID-19 diagnosis;
Has experienced adverse financial consequences as a result of quarantine, furlough, being laid off, or reduced hours 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 is operating under reduced hours because of the disease; or
Meet some other reason that the IRS decides to say is OK.

This new option to withdraw from your 401(k) or IRA is on the table, but should you consider taking it? Below we’ll discuss what you need to know about this change and what to consider before making a decision.

Penalty-Free Access to Retirement Savings

When making an "early" withdrawal from a 401(k), 403(b), IRA or another qualified retirement plan, a 10% penalty applies. This is on top of any taxes that may be due. The IRS defines early as before the age of 59.5. Why the half year? Great question...I have no idea and not enough time on my hands (despite a 24/7 quarantine) to try figure it out. There are several instances that qualify for an exemption to this penalty. First time homebuyers, disability and certain medical expenses to name a few. These exemptions waive the 10% penalty only, not taxes due.

Through changes enacted in the CARES Act, the IRS will now waive the 10% on withdrawals up to $100,000. This money should be to cover financial burdens caused by the COVID-19 pandemic.¹

Taxes still need consideration, but, as an added bonus those who take withdrawals can choose to:

Spread any tax liability of this extra income over the next three years: or
Take three years to return savings (up to the full amount withdrawn) back into the account.

As always, talk to a CPA or Tax Professional before making any decisions.

Banner- Free Guide to 6 "hidden" tax savings

Increase in 401(k) Loan Limits

Some plan sponsors offer the option of taking out a loan on your 401(k) or IRA. There are limits on how much you can withdraw. According to the IRS, the amount was “(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 adjusts this limit to a 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 March 27, 2020. Anyone owing a 401(k) loan repayment before December 31, 2020, can delay their repayment for up to one year.1

Remember this is still a loan! 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.”²Make sure you plan to pay the full amount back in substantial installments each year.

Tax consideration: When you pay back a loan on a Pre-tax 401(k), you are paying it back with after tax dollars! This is a true cost that must accounted for. Consult with your CPA or tax professional before making any withdrawals or loans from retirement accounts.

Considerations About Withdrawing From Your Retirement Savings

This is not a decision to be taken lightly. It would be silly to look at this as a free pass to access your retirement funds. You should only consider this option as a last resort.

As you address the need for money now, remember to consider your need for money in the future. Do you have other options that could be better alternatives?

If you are a small business owner (less than 500 employees) be sure to consider the Payroll Protection Program and Economic Injury Loan and Loan advance program. You may qualify for a $10,000 grant and/or forgivable loans to cover certain expenses during this pandemic.

More info on this programs can be at the Small Business Administrations website: HERE

Before making a big financial decision like this, it’s important to work together with your financial advisor. If you or any one you care about needs to talk through your options, please schedule a time to talk with us today. Click here to check our availablity and to schedule a call.

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.