A A A

Can I Access My 401(k) or IRA Money and What Are the Added Options under the CARES Act?

By Stuart Robertson

Here are answers to many Americans’ questions regarding access to retirement accounts before retirement age including if and how you can access your 401(k) or IRA monies. Moreover, this covers how the Coronavirus Aid, Relief, and Economic Security Act (the "CARES" Act) enables more flexibility to withdraw 401(k) and/or IRA monies for those that are or have been impacted by COVID-19 (see list of qualifications below in this post).

In addition to the video, this blog spells out much deeper details on qualifications, rules, options, pitfalls and more to help you make the right decision for your situation.

CARES Act – Who Can Qualify for These Temporary 401(k) Hardship and Loan Options and/or Early IRA Withdrawals
You are a qualified individual under the CARES Act if any of these apply:

  • Are diagnosed with COVID-19
  • Have a spouse or tax dependent who is diagnosed with COVID-19
  • Experience adverse financial consequences as a result of:
    • being quarantined due to COVID-19
    • being furloughed or laid off or having work hours reduced due to COVID-19
    • being unable to work due to lack of childcare due to COVID-19
    • the closing or reduction in hours of a business owned or operated by the participant due to COVID-19

Your 401(k) plan recordkeeper or IRA provider may rely on your attestation that you satisfy the requirements to be a qualified individual. No documentation is required.

How Much Money May I Access from My IRA or 401(k)?
Your options will vary by your age if you qualify under CARES. Plus, there may be 401(k) provisions for your company's specific plan that impact if you are able to access monies. Your employer can typically choose to change these provisions at any time. IRA withdrawals may be simpler in some scenarios than those from your 401(k). From the sections and chart below, see which best describes you and your situation.

I’m over 59 ½ Years of Age and May or May Not Qualify Under the CARES Act
Whether you qualify under the CARES Act or not, you can likely take withdrawals. With a 401(k) or IRA, if you are over 59 ½ years of age, you are of retirement age, so you qualify to take withdrawals without tax penalties. There is one caveat with a 401(k). Your plan must allow for distributions at the time of reaching retirement age. Some plans may have it set to be different which could prevent you from accessing these monies. The amount you withdraw will be subject to taxes. If you qualify for CARES, you may still want to consider these rules as it may lower your taxes.

I’m under 59 ½ Years of Age, but I Don’t Qualify Under the CARES Act
If you are under 59 ½ years of age, and you do not meet the CARES Act qualifications noted above, the standard rules apply to gain access:

  • If you have an IRA and take a withdrawal, you may take out up to the value of your IRA, but it will be subject to your current tax rate plus the 10% penalty.
  • Your 401(k) plan must allow for hardship and/or 401(k) loan to gain access to your 401(k) monies or you won't be able. If your plan allows, you may take a hardship and withdraw up to $50,000 of your vested 401(k) balance and this will be subject to a 10% tax penalty in addition to your current effective tax rate.
  • If your plan allows, you may take a 401(k) loan for half of your vested balanced up to $50,000. There is no tax penalty, but you may pay a nominal one-time or annual processing charge until it is paid back. Important: if you lose your job or switch jobs, any outstanding balance at the time you separate that is not paid back quickly (generally 30-60 days) is considered a withdrawal, and this unpaid amount will be taxable plus incur the 10% penalty.

I Qualify Under the CARES Act, So How Do My Options Change?
You may take a dollar for dollar early withdrawal of up to $100,000 from either your IRA and/or 401(k) and will not be subject to the 10% tax penalty. Distributions must be made to an individual between January 1, 2020 and December 31, 2020 under the CARES Act. With these withdrawals:

  • You do not incur the 10% “early distribution” penalty that generally applies to distributions from retirement plans and IRAs before age 59½.
  • There is no upfront tax withholding. With a typical early withdrawal, providers must withhold 20% for Federal tax at time of distribution.
  • You may avoid taxation altogether by repaying these distributions back to your IRA or 401(k) within 3 years.
  • If you will not payback some or all of the distribution, you may elect to spread this withdrawal (income) over 3 years to manage tax implications.

If your 401(k) plan does not allow for a hardship withdrawal today, ask your employer to add it. Your employer may do so at any time.

401(k) Loan Limit Is Also Increased to $100,000 if You Qualify Under CARES
Qualified individuals may take a loan from a retirement plan between March 27, 2020 and September 23, 2020. The CARES Act:

  • Increases the maximum loan amount from $50,000 to $100,000.
  • Allows you to take the full amount of your vested benefit as a loan, rather than limiting the loan amount to 50% of your vested balance.

The CARES Act delays the due date for loan repayments for qualified individuals that are due between March 27, 2020 and December 31, 2020 for one year. In addition, it extends the maximum 5-year repayment period accordingly. Note the difference in appicable dates between the 401(k) loan and those for hardship and IRA early withdrawals.

401(k) Loan or Hardship Withdrawal, Which Is Better for Me?
This isn’t a super simple decision. The nice thing about a 401(k) loan is you will pay back the amount you borrowed into your 401(k). The repayments (to yourself) help build back up your nest egg with each payroll. These are preset amounts taken from your paycheck similar to your 401(k) contributions. Most 401(k) loans are paid back over a 5-year horizon. However, this an added payment amount which you may or may not be in good place to afford right now. In addition, if you leave your company or lose your job and you have a 401(k) loan, you will need to pay off the loan in full to avoid being taxed on the unpaid balance. And, if you are under 59 ½ years of age, you are still subject to the 10% penalty on this unpaid balance whether you qualify under CARES or not.

For the hardship withdrawal, if building back that nest egg is important to you, having the discipline to pay it back over the next three years may be tough, as it won’t be automatically taken from your paycheck unlike a 401(k) loan. That said, you will not get hit with any added tax penalty if you leave or lose your job. The amount you withdraw and that you do not pay back into a qualified account will be taxed at your effective tax rate. Know that this withdrawal may increase your tax burden and effective tax rate. A lot of variables to consider. It’s a good idea to talk to your tax accountant about what will be best.

Here's a chart that may help simplify all this:

Options for Those Under 59 ½ Years of Age
Retirement Account Type Do Not Qualify Under the CARES Act Do Qualify Under the CARES Act
IRA Early Withdrawal May take out the amount in your account, Subject to 10% tax penalty and 20% federal tax amount withheld May withdraw from your account up to $100,000, No tax penalty and no federal amount withheld at time of withdrawal, If paid back to your account 3 years it is not subject to taxation; If not paid back you may spread income over three years
401(k) Hardship* May take out 50% of your vested balance up to $50,000, Subject to 10% tax penalty and 20% federal tax amount withheld May take 100% of your vested balance up to $100,000, No tax penalty and no federal amount withheld at time of withdrawal, If paid back in 3 years you are not subject to taxation, If not paid back you may spread income over three years
401(k) Loan* May take out 50% of your vested balance up to $50,000, No tax implications, Paid back with each payroll over 5-years, If you leave or lose your job the amount unpaid is subject to taxes and tax penalties May take out 100% of your vested balance up to $100,000, No tax implications, Paid back with each payroll over 5-years, If you leave or lose your job the amount unpaid is subject to taxes and tax penalties

*403(b), money purchase, profit sharing, and 457(b) accounts generally have the same rules as 401(k)s regarding the above.

We’re wishing you all ongoing good health and safety.


Meet the Author