In response to the COVID-19 pandemic, Congress passed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). There are provisions in the CARES act that are intended to benefit the hardships faced by many businesses, as well as COVID-19 related challenges faced by individuals and families. One such provision included for the benefit of individuals is the ability for “qualified individuals” to avoid penalty for withdrawals from retirement savings and also increased the allowable amount of loan from a 401(k) plan from $50k to $100k.
Who is a “qualified individual”?
A qualified individual is broadly defined as anyone who has suffered adverse consequences due to the Coronavirus. This can mean that you were physically impacted by you or a close relative having been diagnosed with the Coronavirus. It can also mean that you were negatively affected from a financial perspective due to loss of job, loss of hours, decrease in wages, change of role, layoff, furlough, etc.
What is the benefit?
An individual can avoid the 10% early withdrawal penalty that is normally assessed on a retirement plan withdrawal made prior to age 59 1/2 (or the 25% penalty on SIMPLE plan withdrawals). Funds withdrawn from a plan under the CARES act provisions can be spread out evenly as income over the next three years, therefore lessening the tax burden faced in the year of withdrawal.
The CARES Act also increases the amount that you can take as a loan from your retirement plan from $50k to $100k if you are considered a “qualified individual”.
Final Thoughts-
The above mentioned CARES act was created to assist those who may be facing a difficult season due to the Coronavirus and need easier access to their retirement savings. Remember that it is generally not recommended to pull from retirement savings unless absolutely necessary due to the loss of future tax deferred earnings on your investments. Please consult your financial planner or CPA prior to withdrawing funds from your retirement under the protection of the CARES act provisions to make sure that you understand some of the more complex issues involved.
If you would like to discuss this in greater detail, please reach out to us at info@bynumcpa.com or via phone at (615) 896-2864.