The CARES Act provides qualified individuals affected by the coronavirus with access to retirement savings that typically would be inaccessible or subject to early withdrawal penalties. The new law waives the 10 percent early withdrawal tax penalty (that generally applies to early distributions for individuals under 59 ½ years old) from qualified retirement plans (e.g., 401(k) plans, 403(b) plans and traditional IRAs) for coronavirus-related distributions (CRDs) made between January 1, 2020, and December 31, 2020.
Qualified individuals may take up to a $100,000 distribution (in aggregate) from their qualified retirement plans. The waiver is available to individuals: (1) diagnosed with COVID-19; (2) whose spouse or dependent is diagnosed with COVID-19; or (3) who experience adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the U.S. Treasury Secretary.
The CARES Act allows an individual to pay back the funds to a qualified retirement plan during the three-year period beginning the day after the date on which the individual receives a CRD without having the amount recognized as income for tax purposes. Income taxes will still be owed on withdrawn amounts that are not repaid, but individuals are permitted to pay tax on the CRD income over a three-year period. In addition, COVID-19-related distributions are exempt from the 20 percent mandatory withholding that normally applies to certain retirement plan distributions. Employees are required to sign a certification of the reason for the CRD but the plan administrators are not required to verify such certifications.
Things to consider: Before you determine whether to borrow from your retirement account, consider some of the advantages and drawbacks to this decision. On the plus side, you usually don't have to explain why you need the money or how you intend to spend it, the loan fees and interest rate might be lower than those available on a personal loan or a credit advance, and the interest you repay is paid back into your account. On the negative side, the money you withdraw will not grow if it isn't invested, and repayments are made with after-tax dollars that will be taxed again when you eventually withdraw them from your account. Also, if you lose your job, the loan generally will be considered a withdrawal on which you must pay income tax.
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