IRS Makes It Easier To Make Retirement Account Withdrawals—But That Doesn’t Mean You Should

Forbes - June 23, 2020


The $2 trillion CARES Act included a provision that made it easier for taxpayers to take out loans and withdrawals from qualifying retirement accounts without the risk of paying the 10% early withdrawal penalty, and with the ability to repay these withdrawals within a certain timeframe.

While the IRS has addressed this topic in previous announcements and FAQs, they released the formal guidance for this on Friday. You can find it in IRS Notice 2020-50, Guidance for Coronavirus-Related Distributions and Loans From Retirement Plans Under the CARES Act. Brief Overview of the New Retirement Account Withdrawal Rules

The new law applies to those who have experienced “adverse financial consequences” due to the Covid-19 outbreak.

Under the new law, taxpayers are eligible to borrow up to $100,000 from their 401(k) plan, an increase from the $50,000 previously allowed.

The law also permits individuals to take up to $100,000 as distributions from their IRAs or 401(k) plans in calendar year 2020. This $100,000 limit is a cap across all retirement accounts, not from each type of account. The 10% early withdrawal penalty is waived for those who are under age 59½.

Individuals are still required to pay taxes on the amount withdrawn, however, they would have the option of paying taxes over a three year period.

Finally, individuals would have the option of repaying the distribution into their IRA, 401(k), or another eligible retirement account if they cannot repay the amount into the account they took the distribution from. This would be performed as a rollover contribution and must be accomplished within three years of the distribution. The distributions that are repaid as rollover contributions will no longer be subjected to taxes and you would need to file an amended tax return for the IRS to process your rollover contribution.

Definition of Qualified Individuals

This law is designed to provide financial assistance to those who have experienced financial hardship due to the Covid-19 pandemic. So this is not a free-for-all designed for anyone and everyone to withdraw money from their retirement accounts.

Qualified individuals are those who have experienced adverse financial consequences due to any of the following circumstances:

  • Individual, spouse, or dependent who was diagnosed with Covid-19 by using a test approved by the CDC

  • Individual, spouse, or dependent who was quarantined, furloughed, laid-off, of having reduced hours as a result of the Covid-19 outbreak.

  • Individual or spouse who was unable to work due to a lack of childcare

  • Individual, spouse, or household member who is a business owner that had to reduce hours or close their business due to Covid-19

  • Experienced a reduction in pay or self-employment income due to Covid-19, had a job offer rescinded, or a job start date delayed

Just Because You Can, Doesn’t Mean you Should

The intent behind this law is a good one. Millions of people are struggling. There have been over 45 million first-time unemployment claims since March. That also doesn’t account for those who have had their hours cut, experienced furloughs, or have had job offers rescinded.

However, it may not be a good idea to take a distribution or a loan unless it is absolutely necessary. And if you do, it would be best to err on the smaller side and take out just as much as you may need without taking out more than you need. You can take out more than one distribution in the 2020 calendar year if you need more money later. But it’s tempting to spend the extra money if you take out more than is absolutely necessary.

If You Need the Money Should You Take Out a 401(k) Loan or a Distribution?

401(k) loans are inherently riskier than taking a distribution, especially under the new law. The new law allows you to take a distribution of up to $100,000 without being assessed an early withdrawal penalty if you are under age 59½. You still have to pay any taxes due, but those payments can be stretched over three years. Finally, you retain the option of repaying the distribution within three years and being able to file an amended tax return to claim the taxes you paid on the distribution.

On the other hand, a 401(k) loan requires you to immediately begin making payments, with interest, on the amount borrowed. If you default on your 401(k) loan, you would be required to claim the outstanding balance of the loan as a distribution in the year you default on the loan. You would also be required to pay taxes and the 10% early withdrawal penalty if you are under age 59½.

There are other risks to taking out a loan. If you lose your job, for example, you will be required to repay the loan before the due date for your tax return the following year. Otherwise, you would owe taxes and penalties on the outstanding balance.

Of these two options, taking a distribution is a lower-risk proposition. But only if you absolutely need it. This article was written by Ryan Guina from Forbes and was legally licensed by AdvisorStream .








Copyright 2020 Dow Jones & Company, Inc. All Rights Reserved.


The information in this communication or any information within the Asset Strategy Advisors, LLC domain, and or any attachments to any AdvisorStream communication is strictly confidential and intended solely for the attention and use of the named recipient(s). If you are not the intended recipient, or person responsible for delivering this e-mail to the intended recipient, please immediately notify AdvisorStream at privacyofficer@advisorstream.com and destroy all copies of this e-mail. Any distribution, use or copying of this e-mail or the information it contains by other than an intended recipient is unauthorized. This information must not be disclosed to any person without the permission of AdvisorStream LTD. Please be aware that internet communications are subject to the risk of data corruption and other transmission errors. For information of extraordinary sensitivity, we recommend that our clients use an encrypted method when they communicate with us.

  • LinkedIn Social Icon
  • Facebook Social Icon
  • Twitter Social Icon
  • YouTube Social  Icon

To view a copy of our Customer Relationship Summary (CRS), please Click Here

Advisory services offered through Asset Strategy Advisors, LLC. (ASA), Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC, Insurance offered through Asset Strategy Financial Group, Inc. (ASFG). ASFG and ASA are independent of CIS. To access Concorde’s Form Customer Relationship Summary (CRS), please click here.

Asset Strategy does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstances.

There is no guarantee investment plans will meet its objectives.

This site is published for residents of the United States only. Representatives may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed until appropriate registration is obtained or exemption from registration is determined. Not all of services referenced on this site are available in every state and through every advisor listed. For additional information, please contact Asset Strategy at info@assetstrategy.com. 

© 2020 Asset Strategy, LLC 

 Privacy & Use Policies  |  Broker Check  | Tax & Legal Discloure