CARES Act and Withdrawals

The year 2020 had many things happen in it, what do the CARES Act and withdrawals have to do with it?

CARES Act

The CARES Act of 2020 allowed retirement savers to withdraw up to $100,000 from their 401(k) plans and waive the 10% early withdrawal penalty if they’re under age 59½. In fact, over 15% of withdrawers in 2020 who tapped into their retirement accounts have cited a coronavirus/COVID-19 related distribution as the reason.

On March 27, 2020, the President signed the $2 trillion stimulus package called the CARES Act – the Coronavirus Aid, Relief, and Economic Security Act.  The primary purpose of the Act is that boosts unemployment insurance payouts and aims to send relief checks to many Americans. The CARES Act included many important retirement related provisions that were designed to provide retirement account holders with needed capital and liquidity including extra funds available to borrow from a 401(k) plan.

Withdrawals From Retirement Plans

After millions were affected by COVID-19, the CARES Act provided stimulus money in the manner of direct payments, made certain allowances for businesses, and allowed withdrawals without penalty from retirement plans that would normally be untouchable. In light of the economic fallout as a result of COVID-19, the CARES Act increased the 401(k) plan loan from $50,000 to $100,000, without regard to the 50% account value threshold.  Also, all 401(k) plan loan payments are suspended for 2020. Of course, one would need to have access to a 401(k) plan loan feature and take the loan out prior to December 31, 2020. 

If you take the loan from a Solo 401(k) as opposed to an employer controlled plan, there’s no need to get the consent of a custodian or other controlling factor.

There are many advantages of using a Solo 401(k) plan loan:

• •Tax-free & penalty free use of funds
• •Ability to use loan funds for any purpose and also grow your plan
• •Interest paid back to plan
• •5 years or 15 years if used to purchase primary residence
• •Low interest rate
• •Pay back at least quarterly
• •Flexible corrective measures available
• •Plan administrator (you) approve loan
• •Funds can be used for any purpose

If you have been impacted by COVID-19, taking advantage of the CARES Act loan provision may be a tax efficient way to secure needed capital or liquidity in this difficult time. Remember, if you borrow from a 401(k), you must pay it back in a timely matter or risk getting hit with a big tax bill.

Further Thoughts

According to reports from financial institutions, the number of retirement-plan owners who took advantage of the offering was actually quite low, overall. This may be because those who had a significant amount in the bank were not the ones who were most in need of financial assistance during the initial highest point of the pandemic influence.

Individuals with over $100,000 in a retirement account may have been more financially secure, meaning they did not become unemployed due to coronavirus and its implications. Those most directly affected by the economic downturn and instability may have been less likely to have had that amount in their retirement accounts, and therefore were unable to remove the money they would have needed. Additionally, those with the necessary amount in their accounts may have had enough money in other accounts, investments, etc., that they did not need to tap into that part of the CARES Act.

Indications are that there was a median level of withdrawals, meaning most of the funds taken were less than the $100,000 but still few overall participated in the removal, perhaps because not enough Americans have retirement savings in any large amount.

CARES Act And Withdrawals

While no one knows for certain what the future holds, the certainty exists that the withdrawal provision from the CARES Act expires on December, 31,2020. That eliminates the possibility of using the provision, and it seems unlikely that there will be a large jump in takers in the next six weeks or so. Politics aside, the Senate and the House of Representatives may take up further COVID-19 relief in the coming weeks and months.