Retirement account withdrawals allowed by CARES Act without penalty, but should be last resort, experts say

ByJason Knowles and Ann Pistone via WLS logo
Friday, August 21, 2020
EMBED <>More Videos

Currently, under the CARES Act, you can access up to $100,000 from your retirement account and not pay a penalty fee.

CHICAGO (WLS) -- Currently, under the CARES Act, you can access up to $100,000 from your retirement account and not pay a penalty fee. But should you?

While it can be an option for those who qualify during the pandemic, the I-Team found this should still be a last resort.

Ashley Myles was considering taking advantage of the new law as her father's business has been struggling due to the COVID-19 pandemic.

"I was considering that option at the beginning of the COVID outbreak, just being unsure of how things were going with my job, my family," she said.

Myles turned to South Loop financial advisor Carter Cofield, who said he's gotten several similar inquires from five to 10 clients.

Cofield warned clients that you need to know the rules. First, you have to qualify by proving you've been financially affected by COVID-19.

"Even if you do meet the requirements, it is up to your employer to tell you if they're going to allow you to take these withdrawals or not," he said.

The Federal CARES Act allows workers to withdraw up to $100,000 from 401K, IRA or other retirement accounts without having to pay that 10% penalty fee usually imposed on people under 59-and-a-half-years-old.

But there is a downside.

"This could push your retirement back five to 10 years, if you take this money out and don't pay it back," Cofield said.

Second, there could be a huge tax burden depending on how much you take out. If you withdraw the maximum $100,000, you could be looking at a $37,000 tax bill.

However, those taxes could be deferred over three years.

If your employer allows it, you can also choose a loan option where you would not pay any income taxes or a penalty fee. You'd pay yourself the interest, back into your retirement account.

"If you're going to have to take out a loan, this would be the one to take out," said Wallet Hub analyst Jill Gonzalez.

The new law is similar to a traditional loan on your 401k, only better.

"This offers a little bit more in terms of a better interest rate over time," she explained. "And it's more flexibility as far as when you have to pay back, right, your loan repayments can be deferred for at least a year. And in terms of your loan limit, that could also be increased. Whatever loan you could have taken out before COVID-19 that limit has now been increased."

Myles ultimately decided against taking money out of her retirement account.

"If you do it once you're gonna do it again, and you're gonna do it again it's gonna become your emergency savings," said Cofield.

Both financial experts said if you need to take advantage of this law you should take the loan option instead of just withdrawing the money and not paying it back.


The Internal Revenue Service provided a reminder today that the Coronavirus Aid, Relief, and Economic Security (CARES) Act can help eligible taxpayers in need by providing favorable tax treatment for withdrawals from retirement plans and IRAs and allowing certain retirement plans to offer expanded loan options.

Can I get money from my retirement account now?

Under the CARES Act, individuals eligible for coronavirus-related relief may be able to withdraw up to $100,000 from IRAs or workplace retirement plans before Dec. 31, 2020, if their plans allow. In addition to IRAs, this relief applies to 401(k) plans, 403(b) plans, profit-sharing plans and others.

These coronavirus-related withdrawals:

May be included in taxable income either over a three-year period (one-third each year) or in the year taken, at the individual's option.

Are not subject to the 10% additional tax on early distributions that would otherwise apply to most withdrawals before age 59,

Are not subject to mandatory tax withholding, and

May be repaid to an IRA or workplace retirement plan within three years.

Can I take out a loan?

Individuals eligible to take coronavirus-related withdrawals may also, until Sept. 22, 2020, be able to borrow as much as $100,000 (up from $50,000) from a workplace retirement plan, if their plan allows. Loans are not available from an IRA.

For eligible individuals, plan administrators can suspend, for up to one year, plan loan repayments due on or after March 27, 2020, and before Jan. 1, 2021. A suspended loan is subject to interest during the suspension period, and the term of the loan may be extended to account for the suspension period.

Taxpayers should check with their plan administrator to see if their plan offers these expanded loan options and for more details about these options.

Who is eligible?

To be eligible for COVID-19 relief, coronavirus-related withdrawals or loans can only be made to an individual if:

The individual is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (collectively, COVID-19) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetics Act);

The individual's spouse or dependent is diagnosed with COVID-19 by such a test; or

The individual experiences adverse financial consequences as a result of:

o The individual being quarantined, being furloughed or laid off, having work hours reduced, being unable to work due to lack of childcare, having a reduction in pay (or self-employment income), or having a job offer rescinded or start date for a job delayed, due to COVID-19;

o The individual's spouse or a member of the individual's household (that is, someone who shares the individual's principal residence) being quarantined, being furloughed or laid off, having work hours reduced, being unable to work due to lack of childcare, having a reduction in pay (or self-employment income), or having a job offer rescinded or start date for a job delayed, due to COVID-19; or

o Closing or reducing hours of a business owned or operated by the individual, the individual's spouse, or a member of the individual's household, due to COVID-19.

Where can I find more information?

Retirement plan recipients can learn more about these provisions in IRS Notice 2020-50.

The IRS has also posted FAQs that provide additional information regarding this relief.

Additional information on the CARES Act and retirement plans, as well as updates, other FAQs, and other information can be found at

Loan questions and answers:

Q8. What plan loan relief is provided under section 2202 of the CARES Act?

A8. Section 2202 of the CARES Act permits an additional year for repayment of loans from eligible retirement plans (not including IRAs) and relaxes limits on loans.

Certain loan repayments may be delayed for one year: If a loan is outstanding on or after March 27, 2020, and any repayment on the loan is due from March 27, 2020, to December 31, 2020, that due date may be delayed under the plan for up to one year. Any payments after the suspension period will be adjusted to reflect the delay and any interest accruing during the delay. See section 5.B of Notice 2005-92.

Loan limit may be increased: The CARES Act also permits employers to increase the maximum loan amount available to qualified individuals. For plan loans made to a qualified individual from March 27, 2020, to September 22, 2020, the limit may be increased up to the lesser of: (1) $100,000 (minus outstanding plan loans of the individual), or (2) the individual's vested benefit under the plan. See section 5.A of Notice 2005-92.