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If you’re dealing with financial strains due to the coronavirus pandemic, you’re not alone. Over 30 million people have filed unemployment claims since mid-March, and businesses remain shuttered in most states around the country. Worries continue to rise about paying bills each month during the crisis; thus, it’s not surprising that withdrawing from your 401(k) is a serious option for many Americans.
Fortunately, for many, the recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act provides new benefits for retirement account withdrawals. The new law also gives increased options to retirement account holders who may be mandated to take withdrawals this year. Here’s what you need to know about the CARES Act before withdrawing from your 401(k).
Early Withdrawal Penalty and Withholding Tax Payments Waived
Thanks to the CARES Act, withdrawing from your 401(k) early won’t immediately incur heavy tax penalties that dilute the value of the funds when you need them most. If you’re younger than 59.5, the new law waives both the 10% early withdrawal penalty as well as the 20% withholding tax that account holders are normally required to pay upfront. While you’ll still be taxed on the account withdrawal as income, you’ll have up to three years to pay the taxes. However, you’ll have to demonstrate that you were affected by the coronavirus in some manner to qualify for these tax benefits, so ensure you check with your accountant or tax professional regarding the details.
Greater 401(k) Loan Flexibility
The CARES Act also makes it easier to borrow money from your 401(k) during the coronavirus pandemic. The law now allows you to take a loan of up to $100,000 from your 401(k) – up from $50,000 – or up to 100% of the retirement account. Additionally, if you do take out a 401(k) loan to deal with financial necessities right now, you won’t have to begin repaying the loan until next year. While you’ll eventually have to repay the loan in full, and the interest on the loan isn’t tax-deductible, a 401(k) loan may be just what you need to get through the immediate fallout of the coronavirus lockdown.
If you don’t want to make a withdrawal from your 401(k) right now but are at a point where required minimum distributions (RMDs) are mandatory, there’s good news for you as well. The CARES Act has suspended RMDs for 2020, as well as the tax penalties associated with them. Additionally, if you are subject to an RMD this year and received the withdrawal, you also have the option to roll it back into the account, so that it can keep compounding interest. This law will be beneficial to retirement account owners who don’t need the funds right now, those who want to keep building their financial resources for retirement, and those whose retirement funds are in securities that have been negatively impacted by COVID-19.
Think Before Withdrawing From Your 401(k)
If you’re considering taking advantage of one of the new CARES Act benefits to withdraw funds from your 401(k), you should speak with an accountant or trusted financial advisor first. If you do decide on an early 401(k) withdrawal or loan, you’ll eventually be responsible for paying taxes on it or repaying the loan balance with interest. These subsequent cash outlays could put you in a financial bind later on.
Additionally, 401(k) accounts are the key financial component for most retirement plans. If you withdraw some or all of the funds to deal with a coronavirus-induced financial emergency right now, you may have to alter your long-term plans considerably for work and retirement. Based on your age, the condition of the stock market, and the type of securities your 401(k) is invested in, you may take a hit on a withdrawal right now as well. It may make more sense to consider other CARES Act benefits to help you weather the current crisis, such as the enhanced unemployment benefits, or, if you’re a business owner, the Paycheck Protection Plan (PPP).
Talk to an Expert
The CARES Act provides Americans greater flexibility to draw upon their 401(k) savings to deal with financial challenges brought on by the coronavirus pandemic. In some cases, a full or partial withdrawal from a retirement account may be just what you need to pay bills through the lockdown and then head back to work when restrictions ease and businesses begin to reopen. However, there are some drawbacks to withdrawing from your 401(k), and taking early withdrawals could affect your long-term financial plans. Therefore, prior to making any withdrawals from your 401(k), talk to a trusted financial advisor to determine the best options you have for your current situation.