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CARES Act and Hardship Withdrawals

August 30, 2020 | Hector Ortiz and Erin Scheithe, CFPB

If you're out of work and need income, you might be considering withdrawing from your retirement savings. Normally, if you withdraw money from traditional Individual Retirement Accounts (IRA) and employer-provided accounts before reaching age 59 ½, you have to pay a 10 percent early withdrawal penalty.

Furthermore, emergency withdrawals from your current employer-provided plans are limited to an amount needed to meet a limited set of approved hardships, like avoiding for closure, home repair after disaster, or medical expenses.

If the pandemic has had negative effects on your finances, temporary changes to the rules under the CARES Act may give you more flexibility to make an emergency withdrawal from tax-deferred retirement accounts during 2020.

Among other things, the CARES Act eliminates the 10 percent early withdrawal penalty if you are under the age of 591 /2. One third of the money you withdraw will be included as income in your taxes for each of the next three years unless you elect otherwise. The CARES Act also allows you to pay back what you withdrew from your accounts if you're able to do so.

Please note that this blog discusses withdrawals from retirement plans - not retirement plan loans. You may want to spend some time weighing the risks and benefits to withdrawing money versus taking a loan. Learn more about taking a loan from your retirement account.

What tax-deferred accounts are affected by the changes?

  • a traditional IRA
  • an employer-provided retirement plan such as a 401 (k) or 403(b) or other types of defined contribution plans.

Please note that related distribution option. However, you may qualify for a distribution from your plan through other covered financial hardship categories. Money received from these other distributions can be treated as coronavirus-related distributions in your tax return, as long as you can prove that you meet the qualifications stated below.


How do you qualify for the exemption?

  • You, your spouse, or dependent was diagnosed with COVID-19 by a CDC-approved test, OR
  • You experienced adverse financial consequences as a result of certain COVID-19- related conditions, such as a delayed start date for a job, rescinded job offer, quarantine, lay off, furlough, reduction in pay or hours or self-employment income, the closing or reduction of your business, an inability to work due to lack of childcare, or other factors identified by the Department of Treasury.

A coronavirus-related distribution is one that meets this criteria and is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020.

How much can you withdraw without penalty?

You are allowed withdrawals of up to $100,000 per person taken in 2020 to be exempt from the 10 percent penalty. If you have more than $100,000 in one of these retirement accounts, note that it is $100,000 per person and not per account. You can't get the special tax and CARES Act treatments for amounts that you take out that are more than $100,000 total from all of your accounts.

Please note that the CARES Act eliminates the 20 percent automatic withholding that is used as an advance payment on the taxes that you may owe on employer-provided plans like your 401 (k). This 20 percent withholding is not a requirement when you cash out or withdraw from a traditional IRA plan. So, you may not want to spend the full amount you withdraw because you might owe some of that money in taxes later.

Will the full balance be available to you?

If you are withdrawing from an employer-based account and are relatively new to your job and are not considered fully-vested for retirement purposes, the portion of the funds that were contributed by your employer may not be available to you. Even if you are fully vested, your employer may not allow you to access that portion of your account. Remember, the special tax treatment does not apply to more than $100,000 total.

How long will it take to get the money you withdrew from your accounts?

Regardless of how much you can access, you should know that withdrawing money from a retirement account is not as simple as transferring money from a savings to a checking account. The process could take several weeks. If you need the money for something time-sensitive, give yourself at least a two-week buffer in case paperwork gets delayed or is lost. Many companies are struggling to provide customer support via phone or online, and their ability to handle transactions may be limited as well. Talk to your plan provider or administrator about the steps and ask for an estimated timeline.

Is it better to withdraw from your retirement account now, or let it grow?

You may be withdrawing from a fund that has lost value during the COVID-19 pandemic. When you withdraw money from an investment portfolio in a "low" market, you are limiting its ability to grow and regain its value when the market rebounds. A $100,000 withdrawal today, at a growth rate of 5 percent, would grow to about $160,000 in 10 years without any additional contributions.

Possible tax consequences and ways to deal with them

There are possible tax consequences and different ways to deal with them. While the Act protects you from the 10 percent early distribution penalty, it does not exempt the withdrawn amount from taxes. The amount will be added to your annual income and taxed as such. If you don't ask to have a percentage of the amount set aside for taxes when you withdraw, you could end up owing a lot when you file your 2020 taxes. The CARES Act distributes the tax burden over a period of up to three tax years, unless you choose not to, and lets you recontribute some or all the funds that you withdrew by the third year and file amended tax returns. You may need to hire a tax professional to help you file. Find out if you qualify for free help filing your taxes.

Watch out for fraud

Be aware that you may be targeted by scammers that will promise to get back what you have lost in your accounts or offer extraordinary profits during these times. They may claim that there are no risks and high returns. These offers are likely scams. Don't let fraudsters steal your hard-earned money and savings you've built over the years. Always check the background of any investment professional to be sure you're not dealing with a scammer by using free information provided by the Securities and Exchange Commission.

Find more information regarding COVID-19 from CFPB

We're working to continuously update information for consumers during this rapidly evolving situation.

We will publish all COVID-19-related information and blogs to our resource page. Information should be considered accurate as of the blog publish date.

The views, information, or opinions expressed in this article are solely those of the author and do not necessarily represent the views of Citizens State Bank and its affiliates, and Citizens State Bank is not responsible for and does not verify the accuracy of any information contained in this article or items hyperlinked within. This is for informational purposes and is no way intended to provide legal advice.