If you are impacted by the coronavirus and are thinking about cashing out your 401(k) retirement funds consider that normally, in accessing your retirement funds the penalty for withdrawing from a 401(k) before the age of 59 ½ is 10% of the distribution, plus an automatic withholding of a least 20% for taxes. But with the passage of the CARES Act (Coronavirus Aid, Relief and Economic Security Act), that all changes in 2020.
The Coronavirus Aid, Relief and Economic Security Act, which allocates $2 trillion toward economic stimulus and relief in the wake of the coronavirus pandemic, includes several provisions that make it easier for those affected by the outbreak to access retirement funds.
The $300 billion earmarked for direct payments is getting considerable attention, but the CARES Act’s language on early withdrawals from retirement accounts is remarkable in itself. Below is a broad overview:
- Individuals affected by COVID-19 can withdraw up to $100,000 from employee-sponsored retirement accounts like 401(k)s and 403(b)s, as well as personal retirement accounts, such as traditional individual retirement accounts, or a combination of these.
- The 10% penalty will be waived for distributions made in 2020.
- There are no mandatory withholding requirments.
- The distribution can be taxed as income spread evenly over tax years 2020, 2021 and 2022. However, if you can pay back the amount you took out within three years, you can claim a refund on those taxes.
- 401(k) plan participants can now take out 100% of their vested balance (previous rules limited to borrowers to 50%) as a loan up to $100,000 and payments on this loan can be delayed for up to one year.
The CARES Act also waives required minimum distributions from retirement accounts in 2020 – a significant update for today’s retirees.
Those aged 70 ½ and older can also forgo the distribution and let it grow for another year, which can help prevent retirees from having to sell stock investments at a bad time. This can also allow retirees to reduce their income taxes in 2020 without the distribution. What’s more the IRS announced on June 23 that anyone who has already taken an RMD (required Minimum distribution) for 2020 can roll it back into a defined-contribution retirement plan or IRA by Aug. 31, 2020.
This is part 1 of “Assessing Retirement Funds” for Part 2 see “401(k) loans versus 401(k) distributions” blog.
