The coronavirus has changed many aspects of people’s lives.  Besides dealing with health concerns, peoples’ finances have also been greatly impacted. As many people deal with losing their job or reduced work hours, they are finding themselves in need of money to pay their bills and put food on the table. 

In response to the domino effect the coronavirus is having, the federal government has waived the penalty for 401K withdrawal. The move is aimed at making money available to people now when they need it.

What Does the Waiver Mean for Me?

Under the CARES Act, people of any age can withdraw up to $100,000 from their retirement accounts without paying the 10 percent early withdrawal penalty. Under the law, anyone younger than 59 ½ who withdraws from their retirement accounts would have to pay the 10% penalty. The new rule also increases the amount that can be withdrawn from retirement accounts from $50,000 to $100,000.

Although the penalty is now waived, there will still be taxes to pay, just not now. The law allows you to spread out the tax payments over three years. This is aimed at lessening the burden and letting people get back on their feet without worrying about having to pay all of the taxes at once.

Who is Eligible for the Waiver?

Under the legislation, the money should be taken out due to a coronavirus-related situation. This can include:

  • People diagnosed with COVID-19 by a CDC approved test
  • People who have a spouse or dependent who has tested positive
  • People who have been affected financially due to the virus including those being quarantined, furloughed, laid off, or have been unable to work because they can’t find child care due to COVID-19

Those supervising the retirement accounts are told to take people’s word that they are eligible. 

What Types of Accounts Qualify for the Waiver?

All retirement accounts are affected. This includes IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs, 401ks, pension plans, 457 plans, and 403 (b) plans.

It’s also important to know that you can take out as many loans as you want just as long as the amount does not exceed $100,000.

What Can I Use the Money For?

There are no rules as to what the money needs to be used for specifically. You can use it for personal expenses, education expenses, or business purposes. It’s your money, so you decide what you need to use it for.

If you take out more money than you end up needing, you can pay it back in one lump sum.

What Does the Legislation Mean for Retirees?

The legislation also loosens the rules for retirees and their retirement accounts. Rules call for retirees to start taking money out of their tax-deferred accounts when they reach their early 70s. They pay taxes on the amount that’s taken out. During the 2020 calendar year, that rule is rescinded.

This can be a big help for retirees because the amount they would have been required to withdraw would have been based on their 2019 account balances. Those balances would have been much higher than they are now. Since the coronavirus hit, the markets have taken a huge hit, with the impact being seen in many people’s retirement accounts.

What Else Does the Legislation Do?

The legislation also aims to help people who already have a 401k loan. Any outstanding loans due before December 31, 2020, have been delayed for up to one year. This can help people who may owe the money but now don’t have the money to pay it because of the coronavirus.

Besides waiving the penalty for 401k withdrawal, the legislation also extends the 2019 IRA contribution deadline to July 15, 2020, from the usual April 15th dadline. Also, if you took an early withdrawal from a 401k account or IRA in 2019 before you were 59 ½ and were charged an early withdrawal penalty, you can now delay that penalty payment. That payment won’t be due until July 15, 2020, which is now the new tax filing deadline.

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Should People Take Advantage of the 401k Penalty Waiver?

Everyone’s financial situation is different, so there is no right or wrong answer to this question. Generally speaking, withdrawing from a retirement account is looked at as a last resort. Taking this money out now, especially if you’re not going to be able to repay it, can have a lasting impact once you reach retirement age. The U.S. Government Accountability Office estimated last year that Americans ages 25-55 withdrew approximately $69 billion from their retirement accounts. That amount was before the coronavirus hit.

Many fear that people will see that large $100,000 number and jump at the chance to withdraw that much money without thinking about the consequences. If you are considering withdrawing from your 401k right now due to the coronavirus, you should consider several things:

  • You will have to pay income tax on any amount you withdraw. While you are not obligated to pay it back now, it will still be an expense you need to account for over the next three years.
  • If you take the money out now, you’re withdrawing money from an account without allowing it to recover. The money you withdraw now will not be there to reap the benefits when the markets bounce back.
  • If you can not repay the money, you run the risk of falling short of funds during your retirement.

Taking these things into consideration, people are encouraged to look at other ways to deal with the financial effects this health crisis is having. This includes talking to creditors to see if arrangements can be made. People are also encouraged to look at ways to cut expenses to save money during this time.

If you are considering taking advantage of the penalty waiver, consider the effects it will have on your upcoming retirement or current retirement before withdrawing any money. While the waiver was put into place to help people during this time, it may not have the same benefits for everyone.

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Remember to borrow responsibly.

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