How to Access Emergency Money via the CARES Act

The Coronavirus Aid, Relief and Economic Security Act (CARES Act) has provided immediate access to retirement funds for qualified individuals that might otherwise be difficult or costly to tap. “Coronavirus-related distributions” or CRD’s are now permitted under certain circumstances from 401(k), 403(b) and IRA accounts with special tax relief.  Here is what you need to know:

  • Who is eligible? There are two basic categories of individuals who are qualified for a CRD. First, are those who have been diagnosed with COVID-19 (or SARS-CoV-2) or whose spouse or dependent was diagnosed with the virus. Second, are individuals who have experienced adverse financial consequences such as being quarantined, furloughed, laid off or having work hours reduced.  If you do not meet one of these two criteria, then you are not eligible for the CRD.  Note: the CARES Act does not specifically address reductions in salary.  For example, if you received a 15% pay cut but are still working, you may not be eligible.  Further guidance on this is expected.
  • How much? The CARES Act allows an individual to take up to $100,000 (or the vested balance if less) from their IRA or company retirement plan without the normal 10% tax penalty – even if they are under the age of 59 ½. This effectively doubles the available loan amount since traditionally plan loans are capped at $50,000 or 50% of the vested balance.  Note: this is $100,000 in total; IRA and company plan withdrawals are aggregated.
  • What are the taxes? Although the distribution is taxed as income, it can be spread out ratably over a 3-year period, which helps reduce the tax burden: 2020, 2021 and 2022.

The normal 20% withholding tax on distributions from retirement plans is suspended for CRDs.

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  • When does this apply? Distributions can be taken any time in 2020 including the period of January – March before the CARES Act was passed.
  • What are repayment terms? The individual can repay the funds taken from either the IRA or the company retirement plan for a period of up to 3 years (through 2022) from the distribution. If repaid, the taxes incurred (federal and state) from the distribution will be refunded. According to current guidance from the IRS, individuals will need to file amended tax returns to claim their refund. Note: repayment is optional. You can choose either to treat the CRD as either a loan or a simple withdrawal.  
  • What about loan suspension? The CARES Act also provided the suspension of loans due between 3/27/2020 and 12/31/2020 for up to one year which will likely help those with existing loans from their retirement plans.
  • Interesting Fact: The CRD funds have no restrictions on use, unlike normal hardship distributions from retirement plans.

A note of caution. The CARES Act has certainly opened the door for people to tap their retirement savings, but the easy access to funds may lead to individuals spending more money than they need.  The decision on whether you should take advantage of this should be carefully weighed.  Before tapping retirement accounts, we generally suggest using your savings or emergency funds, unemployment insurance, and stimulus payments.  It is also critical to determine how much money you really need.  Any withdrawals from your retirement accounts should be viewed as a solution of last resort.  In reality you are borrowing money from your own future.  Our advice is to take only what you need and try to repay the loan if possible.  Your future self will thank you.