What is a 401K Withdrawal Coronavirus Cares Act (Guide)
What is a 401K Withdrawal Coronavirus Cares Act (Guide)
The new coronavirus economic relief law is making it easier for people in need to access retirement funds early to get through hard times right now.
The recently passed coronavirus aid, relief, and economic security act, or CARES Act, allows for people under 59 1/2 years old to withdraw up to $100,000 from their 401(k) plan without paying the traditional 10% penalty.
Withdrawals can only be made to cover financial hardships related to the coronavirus pandemic.
You do still have to pay income tax on early withdrawals, but the law allows you to pay those taxes over a three-year time period.
Any withdrawals would have to be made during this calendar year.
Withdrawing funds from your retirement plan should be a last resort and should be paid any funds back in the next three years to avoid paying taxes on your own money and to protect your investments.
The Cares Act Withdrawal from 401k
The CARES Act makes it easier for Americans struggling with economic hardship from the coronavirus pandemic to withdraw money from their retirement accounts.
Should you take advantage of it?
Experts typically advise against it, but the fallout from the crisis has left many people scrambling to pay their bills after being laid off or furloughed.
The new provisions from the CARES Act allow Americans to draw down money from tax-deferred accounts without penalties.
It also relaxes rules on taking out a loan from a 401(k) savings plan.
But there are factors to consider before rushing to tap into your retirement funds.
Evaluate your short-term financial needs and potential tax implications when considering whether to withdraw money from your nest egg.
You should dip into that as a last resort.
Americans need to think long and hard about other sources of savings first before withdrawing money from retirement funds.
Should I withdraw money from my 401(k) during the Covid-19?
John H. found out last month that he had been let go from his job.
The 49-year-old was a sales manager in a firm that provides marketing software for lawyers .
Now he’s worried about how he’s going to make his monthly $2,300 mortgage payment.
“Unemployment isn’t going to cover my mortgage payment. My wife and I have already talked about dipping into our 401(k)s so that we can get by with our two kids.”
Experts advise taking a look at your expenses to identify where you can cut costs if you’re facing unemployment.
To be sure, pulling funds from retirement accounts out of fear isn’t the best immediate course of action. It’s a case-by-case basis.
Do you have emergency savings?
Are there opportunities to refinance student loan debt, mortgage or car payments?
Investors should take advantage of lower rates first before they tap into their retirement funds.
Once you pull funds out of your retirement accounts, it could take a while to replenish and it could be quite detrimental to long term savings goals.
People should cut expenses and take advantage of the emergency checks coming from the government’s stimulus package before withdrawing money from their 401(k)s.
How does a 401(k) withdrawal work?
A 401(k) plan is a retirement option offered by employers, which gives employees a tax break on money set aside for their golden years.
Depending on the employer’s 401(k) plan, contributions made to retirement savings could be matched by employer contributions.
Typically, employers match a percentage of an employee’s contributions, up to a certain portion of their salary.
One provision from The CARES Act allows investors of any age to withdraw as much as $100,000 from retirement accounts including 401(k) plans and individual retirement accounts this year without paying an early withdrawal penalty of 10%.
They can avoid taxes on the withdrawal if the money is put back in the account within three years.
If it isn’t returned, taxes can be paid over a 3 year span.
Should I take out a loan from my 401(k) during Covid-19?
Under the CARES Act, you can take out a 401(k) loan for up to $100,000, or if lower 100% of the vested account balance for the next six months.
That’s up from a prior limit of $50,000, or if lower 50%. Individual retirement accounts don’t allow loans.
Typically, you have up to five years to repay a 401(k) loan.
Now the new provision gives Americans an additional year to pay back the loan, raising the time period to six years.
Outstanding loans due between March 27 and Dec. 31 will also be extended by a year.
You could consider taking out a loan to tide you over if you’ve been furloughed, but are confident that you’ll be working again in the near future.
A 401(k) withdrawal would make more sense for someone who has been laid off and doesn’t have a safety net or enough saved for basic expenses over the next three to six months.
To be sure, if you lose your job, you could be on the hook for taxes for the amount borrowed for a loan.
The loan and withdrawal changes may provide current and future retirees more flexibility, but individuals need to understand the potential long-term financial consequences.
You want to access your immediate savings first before you take out a loan or withdrawal from your 401(k).
History tells us that when markets rebound after a downturn, it typically happens fast.
Tapping into your retirement funds may prevent you from benefiting over the long haul if you take out loans and stay out of the market.
Does my employer offer these provisions?
The provisions aren’t automatic.
The CARES Act loan and distribution provisions require employers to adopt those rules.
So you need to ask whether your employer offers these provisions in your 401(k) plan.
About 75% to 85% existing 401(k) workplace plans currently offer some type of hardship or loan provision.
Depending on your needs, you still have options even if your employer doesn’t include the new provisions.
Prior rules allow Americans to take out a 401(k) loan of up to 50% of their vested account balance, or a maximum of $50,000.
Who qualifies for the 401k Cares Act Withdrawal?
To qualify for the retirement distributions or loan provisions, you must have suffered a financial hardship from the pandemic.
That includes being diagnosed with Covid-19; subject to quarantine; a business closure or reduce your hours; inability to work due to child-care issues; or if you’re not self employed and were laid off or had hours reduced.
401k Withdrawal Coronavirus Advice – What is a 401K Withdrawal Coronavirus Cares Act (Guide)
You should ask yourself :
How long did it take you to save that amount of money that you are thinking about taking out? Because, it may take you that amount of time to replace it.
Under the CARES act, if you are furloughed, or your hours are cut back you should still contribute to your 401K if you are getting a paycheck.
The contributions would automatically stop if your paychecks stop since they are salary based.
If they are taking out $50,000 or $100,000, they are going to set themselves back by that same amount.
401K Withdrawal Covid-19 Financial Advice
So when we are looking at retirement goals, it’s all about achieving those goals and getting back to those goals so there will be a dramatic impact on those savings goals.
Some might see this as a “quick and easy way to access money, but they will be going down a dangerous road.
Pulling money from a 401(k) or an IRA is a short-term solution with long-term consequences.
Even though the early withdrawal penalty is waived, you still must pay taxes on the distribution.
Most people who take money out of retirement accounts never put it back.
And if your retirement is many years down the road, you stand to lose a lot of gains in the market over those years.
Some better ways to cope would with the loss of income would be to speak with a financial advisor and develop a plan.
Begin to manage finances by reducing expenses.
One way would be to eliminate spending on non-essential items.
You can tap into other savings and non-retirement investment accounts.
And talk with your mortgage or auto lender about concessions they might make on debt repayment.
This economic slowdown is happening because of a pandemic and is much different that the recession in 2008.
Our banking system is much stronger than it was back then and that’s a good sign for a quicker economic recovery.
Contact us if you have questions about your personal situation, because each case is different.
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