401(k) Retirement Plans and COVID-19
Planning for or during retirement doesn’t stop because of a pandemic. Here are a few important tips and notes regarding the impact of COVID-19 on 401(k) retirement plans.
Can I withdraw money from my 401(k) to cover expenses related to COVID-19?
Generally, if the account is an eligible retirement plan, the plan may permit you to take a COVID-19-related distribution if:
- You, your spouse, or dependent has been diagnosed with COVID-19;
- You have experienced adverse financial consequences because you have been quarantined, furloughed, laid off, or have had work hours reduced due to COVID-19;
- You are unable to work because of a lack of childcare due to COVID-19;
- You own or operate a business and have had to close or reduced hours due to COVID-19; or
- You have experienced an adverse financial consequence due to other factors as determined by the Internal Revenue Service (“IRS”).
Is there a cap on how much I can withdraw?
Yes. You can withdraw up to $100,000 in COVID-19-related distributions from accounts in eligible retirement plans through the end of the year (December 31, 2020).
What types of accounts are covered by the new withdrawal rules?
The special withdrawal rules apply to the following retirement plans:
- Individual retirement accounts (“IRAs”) and annuities;
- Qualified pension, profit-sharing, or stock bonus plans, including 401(k) plans;
- Qualified 403(a) annuity plans;
- 403(b) annuity contracts and custodial accounts; and
- Governmental section 457 deferred compensation plans.
Will I be charged the 10% penalty for an early withdrawal under the new rules?
No. As long as your early withdrawal is due to a COVID-19-related reason, as listed above, you will not face a 10% tax penalty on any early withdrawals made on distributions under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.
I’m a retiree. Am I required to withdraw money from my 401(k)?
Normally, retirees with a 401(k) plan, IRA, or other retirement plan are required to make withdrawals when they reach a certain age. This is known as a “required minimum distribution” or “RMD.” Failure to make an RMD has serious negative tax consequences and may result in a 50% tax penalty. Fortunately, however, the recently enacted CARES Act includes a temporary waiver of RMDs for certain contribution plans, including 401(k) plans. This waiver applies to distributions for 2020 and to distributions for 2019 that were due by a required beginning date in 2020 and not paid in 2019.
Why would I want to hold off on making withdrawals?
If you are confident in your investment strategy and are financially stable enough to forgo withdrawals at this time, it may be financially prudent to hold off on making withdrawals during a market downturn. Historically, markets follow cycles and generally recover over time. As such, you can avoid taking losses now by not selling amid the economic uncertainty of COVID-19. Additionally, not making withdrawals will help your savings last longer.
Ultimately, these new retirement rules and regulations can assist you in better responding to the economic consequences of COVID-19. Regardless of whether you’re still planning for retirement or are currently in retirement, it is important to position yourself and your assets in the best financial position to respond to the COVID-19 crisis.