Coronavirus-related 401(k) distributions

Through the end of 2020, the CARES Act allows a new type of hardship withdrawal for participants in 401(k)-type defined contribution plans or individual retirement accounts (IRAs) who are affected by COVID-19. The new coronavirus-related distribution (CRD) is not subject to the 10 percent early-distribution penalty and may be repaid over three years. Distributions may not exceed $100,000 per eligible participant.

Income taxes will still be owed on withdrawn amounts, but the law also lets individuals pay tax on the CRD income over a three-year period. Those repayments would not be subject to annual retirement plan contribution limits.

The waiving of the 10 percent penalty applies retroactively to withdrawals beginning Jan. 1, 2020, for account holders if:

  • They have received a diagnosis of COVID-19.
  • A spouse or dependent has received a diagnosis of COVID-19.
  • They experience, due to COVID-19, adverse financial consequences as a result of being quarantined, furloughed or laid off; having work hours reduced; or being unable to work due to lack of child care, or other factors as determined by the Treasury secretary.

 Loans from 401(k) plans

Repaying a loan from 401(k) savings generally is a better alternative to permanent withdrawals, financial advisors say.

Through Dec. 31, 2020, the CARES Act doubles the current retirement plan loan limits to the lesser of $100,000 or 100 percent of the participant’s vested account balance for the next six months. Generally, loans are limited to the lesser of $50,000 or 50 percent of the participant’s vested balance and must be paid back within five years.

Individuals with an outstanding loan from their plan with a repayment due between March 27, 2020, and Dec. 31, 2020, can delay their loan repayments for up to one year.

Minimum distributions suspended

 For retirees, the law suspends in 2020 the required minimum distributions (RMDs) that account holders must take from tax-deferred 401(k)s and IRAs starting at either age 70 1/2 or 72 (for those who turned 70 on July 1, 2019, or later). This provision provides relief to those who would otherwise be required to withdraw funds from their retirement accounts during the stock market decline linked to COVID-19.

Unlike other retirement plan provisions in the CARES Act, the 2020 RMD suspension is not limited to participants affected by the coronavirus.

*You can also view the following video on Coronavirus Relief – $100K 401(k) Loans & Penalty Free Distributions From Retirement Accounts.

For more information, visit EMPOWER RETIREMENT