To further alleviate the economic hardships created by the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the $2.2 trillion federal stimulus package recently enacted by Congress, allows individuals to withdraw money without penalty or borrow money from their retirement accounts.
Individuals will be able to withdraw up to $100,000 from their 401Ks or IRAs this year without the usual 10% penalty, as long as the withdrawal is because of financial hardship due to the pandemic. Moreover, there will be tax benefits associated with the withdrawal.
Normally, individuals are taxed on the withdrawal at their ordinary income tax rate during the year the withdrawal is made. However, under the CARES Act, if one withdraws the funds this year because of the pandemic, the individual has the option pay taxes associated with the withdrawal over the course of 3 years from the date of the distribution instead of all at once the first year. The CARES Act also allows the withdrawn money to be “recontributed” to an eligible retirement plan within three years without the amount counting toward annual contribution limits.
Additionally, the CARES Act allows individuals greater opportunity to borrow money from their retirement accounts. Normally one is limited to taking out a loan of no more than $50,000 or 50% of the vested account balance, whichever is less. Currently and for 180 days after the passage of the CARES Act and with certification that they have been adversely affected by the pandemic, individuals will be able to take a loan of up to the lesser of $100,000 or 100% of one’s vested account balance. Loan funds are not taxable as ordinary income when they come out of the plan and can be repaid. However, if the individual defaults on re-paying the loan, that individual will get hit with the 10% early withdrawal penalty.
If you have a question about any options available to you under the CARES Act, please feel free to contact us at email@example.com and an attorney at Nochumson P.C. will immediately reach out to you to schedule a free consultation.