The Coronavirus Aid, Relief, and Economic Security (CARES) Act contains a provision that allows up to $100,000 be withdrawn from a 401(k), IRA or other retirement plan without the 10% early withdrawal penalty that is typically imposed on withdrawals made before the account owner reaches age 59-1/2. Those who decide to use this option can claim a “coronavirus related distribution” (CRD).
According to Market Watch, a CRD can be taken by any person who has been diagnosed with COVID-19 (or SARS-CoV-2), their spouse or dependent. Even undiagnosed people can take a CRD if they have adverse financial consequences because of being quarantined, furloughed, laid off, given reduced hours, or are unable to work because of childcare responsibilities brought about by the current crisis. In addition, business owners who have closed the business or reduced hours are eligible for a CRD.
In addition to avoiding the 10% penalty, CRD recipients can spread the payment of their tax obligations on the withdrawal over a three-year period. Once they recover financially, they can recontribute the withdrawal back to their plan.
Is It a Good Idea to Take a CRD?
Most financial experts are saying that taking retirement funds right now should be a last resort. They acknowledge that we are in a state of crisis, and crises sometimes warrant drastic action. If you’re on a sinking ship, you should absolutely grab whatever life vest you can. However, draining retirement resources now will likely create future hardship when funds will be needed in actual retirement.
More importantly, experts all agree that the most significant penalty for early withdrawals right now is the inability to capture future market gains as the market recovers. It’s also a disadvantage to cash out now, especially if invested in equities, after a roughly 25% market dip. While it’s impossible to predict future values, selling investments at a market low means participants are locking in that loss rather than waiting for markets to improve.
For further reading on the topic, check out these articles:
- “Should I withdraw money from my 401(k)? The CARES Act allows no-penalty withdrawals, but experts advise against it,” USA Today
- “What to expect if you have a 401(k) loan and lose your job,” CNBC
- “401(k) Hardship Withdrawals and Loans Are Different. We Answer Your Questions About the Cares Act.” Barron’s
- “Should you use the CARES Act to access your retirement funds?” Market Watch
- Investor Tips: “CARES Act 2020: Retirement Fund Access and Student Loan Relief,” FINRA.org