Under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which began on March 27, 2020, there are a number of ways that financial assistance is provided for the American people. One important part, in order to financially assist individuals with their everyday expenses, allows hardship withdrawals to be made from IRA or 401K retirement accounts without penalty no matter how old you are. This applies to all accounts up to $100,000 during 2020. A few of the main hardship withdrawal qualifications are as follows:
- The owner of the IRA or 401k account is diagnosed with COVID-19; or a spouse or dependent of the account owner is diagnosed with COVID-19.
- The owner of the IRA or 401K account is experiencing financial troubles due to being shut-in, furloughed, laid off, had their hours reduced or is unable to work due to lack of child care due to the current coronavirus pandemic.
- Small business owners, who also own a IRA or 401K account, and had to close or reduce their hours of business due to the coronavirus may also make hardship withdrawals of their IRA or 401K plans without penalty.
- Please note that other factors might be considered and are determined by the Treasury Secretary. You should consult with your plan administrator for any additional reasons which may qualify and are available to you.
If you do make a hardship withdrawal, please remember that you will need to pay individual income tax on the full amount withdrawn. We strongly suggest that a portion of the withdrawal be set aside for income tax purposes. However, you can avoid some of these taxes by rolling over a portion of the hardship withdrawal into another defined contribution plan, or you repay the plan a portion of the amounts distributed to you by December 31, 2020. The remaining balance of the hardship withdrawal, after rollovers and repayments, would be subject to income tax as of December 31, 2020. Also, if additional repayments are made within the next two years to the plan, the taxpayer can amend their 2020 income tax return showing the future repayments and claim a refund of the tax initially paid.
Another alternative, instead of taking a withdrawal, would be to apply for a loan against your 401K plan. This option is only available to 401k type accounts under ERISA guidelines. It does not apply to IRA accounts. The CARES Act also doubles the amount you can borrow from your 401k plan to $100,000, instead of the normal $50,000 limit. If the total amount borrowed from your 401k plan is paid in full within three years, no income tax would be due on the amount. If the full amount of the loan is not repaid within three years, income tax would only apply to the unpaid balance that was not repaid.
Please contact your Financial Advisor or Accountant for assistance in determining whether a hardship withdrawal is a good alternative for your particular situation. For a referral to a financial advisor or accountant, contact a certified elder law attorney, such as Linda Strohschein and her team at Strohschein Law Group. To set up an appointment, contact Strohschein Law Group at 630-377-3241.