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The CARES Act, passed in March, allowed individuals to access their retirement accounts without penalties if they were experiencing financial challenges due to the coronavirus crisis. Last week, the IRS expanded the eligibility criteria for who can make penalty-free withdrawals from their tax-advantaged accounts.
Before we explore the new updates, let’s take a moment to review the temporary changes introduced by the CARES Act that impacted retirement account withdrawals during the pandemic:
You are now able to withdraw up to $100,000 from your retirement account for coronavirus-related reasons, with the usual 10% penalty being waived. You have until the year’s end to complete the withdrawal.
If you return the money within three years, you won’t owe income tax on it. If not, you’ll have three years to settle the tax on that amount.
You can also opt to take a loan from your 401(k), 403(b), or other employer-sponsored retirement account, borrowing up to $100,000 instead of the usual $50,000. (Loans are not allowed from your IRA.)
This opportunity is only available for 180 days following the bill's passage on March 27, which means it expires at the end of September.
To be precise, that deadline falls on September 22.
The IRS is now broadening the temporary provision to encompass additional reasons for financial strain related to the pandemic and its related shutdown measures.
Previously, if you or your partner or dependent didn’t have a coronavirus diagnosis, the hardship had to stem from being quarantined, furloughed, laid off, facing reduced hours, or being unable to work due to the lack of childcare. However, eligibility could also extend to "other reasons as determined by the Secretary of the Treasury."
Now, eligible circumstances also include experiencing a reduction in pay, having a job offer revoked, or facing delays in the start date of your job.
If your spouse or another household member faces any of these issues, you can also access funds from your own accounts. Previously, the economic impact had to directly affect your own earnings.
This announcement may provide assistance for families still dealing with the long-term effects of the coronavirus on their ability to earn or sustain a stable income. However, as previously mentioned, you must carefully weigh the decision before withdrawing funds.
While there is no penalty for early withdrawal, taxes will apply if you don’t replenish your account within three years. If you reach the end of this period and haven’t restored your financial position, you’ll be responsible for paying that income tax.
Another consideration is the potential loss of portfolio growth. Of course, if you're in a tough situation and urgently need cash, it’s completely understandable to prioritize putting food on the table today rather than focusing on securing a comfortable retirement in the future.
If you’re contemplating this option to make ends meet, take a realistic look at your financial outlook for the next three, six, or twelve months. Do you believe your financial struggles are short-term, or might you be facing extended unemployment or a reduced income for a while? Regardless, if you decide to go ahead with the withdrawal, you’ll want a solid plan to replenish your account once things stabilize.
