CARES ACT: CONSIDERING 401(K) WITHDRAWAL BECAUSE OF UNEMPLOYMENT DUE TO COVID-19 PANDEMIC? by Donnell Stidhum
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he effect of the COVID-19 pandemic lockdown is felt far and beyond. The lockdowns and quarantines that were necessary to curb the spread of the virus slowed the economy with unprecedented force and speed. Businesses racked up losses, and layoffs and pay cuts followed. With increasing rate of unemployment, many families are struggling to meet their day to day expenses. If you are facing financial hardship due to COVID-19, you may have considered making a 401(K) withdrawal early to cover your expenses. I’ve broken down all the steps to complete this process in a 30 minute webinar you can access here
59 1/2, withdrawing from a 401(k) is a costly proposition because you are charged a 10% penalty on withdrawn funds. The recently introduced CARES Act changes that. This means you can make COVID-19 related withdrawals of up to $100,000 from your retirement account without incurring this penalty on early withdrawals. Although the removal of this penalty takes off one of the substantial burdens of taking out the money from a 401(k) early, raiding your retirement accounts is still be a costly proposition because you lose out on the compound interest your money would’ve earned if it had stayed invested.
Financial experts do not recommend taking money out of your retirement accounts early, but now taking into consideration the present economic scenario, most of them say that if you must, you should, as a last resort.
So, early 401(k) withdrawal is now penalty-free, but is it completely tax-free? No.
In the wake of the coronavirus pandemic, President Donald Trump signed the CARES Act on March 27, 2020, providing more than $2 trillion in financial relief for businesses and workers affected by the pandemic. If you are considering a 401(k) withdrawal, there are certain things you need to know.
WITHDRAW MONEY OF UP TO $100,000 WITHOUT PENALTY Under normal circumstances, if you’re under
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INCOME TAXES APPLY TO THE WITHDRAWAL AMOUNT, BUT THE REPAYMENT CAN BE STRETCHED OUT OVER THREE YEARS
Withdrawing money from your 401(k) will still have tax consequences. Regardless of how old you are, when you take out money from your retirement account, you will be taxed as normal. But the CARES Act allows you to stretch the repayment of the taxes over three years instead of paying the entire amount this year. This arrangement provides some financial relief as the taxes can be substantially large, even without penalties.
THE POWER IS NOW MAGAZINE | NOVEMBER 2020
