How the CARES Act Can Help With Early Retirement Withdrawals

If you’re one of the 13 million people who have been laid off as a result of the Covid-19 pandemic, you may be looking for additional sources of income.

To help people, Congress included as part of the $2 trillion CARES Act  a provision that may let you take out money from your retirement accounts, if you’re under the age of 59 ½ and are dealing with adverse financial or health situations related to Covid-19. 

Here’s what’s changed, if you choose to withdraw money from your retirement account:

• Holders of traditional IRA or 401(k) accounts who are under 59 ½ may now take out up to $100,000 during the 2020 tax year, without paying the standard 10% that previously applied as a penalty. The same goes for nonprofit workers who have 403(b) accounts. (Fifty-nine-and-a-half is usually the standard age at which account holders could start taking out money from retirement accounts with no penalty). 
• The money you withdraw must be added to your income for the 2020 tax year. You would still owe income taxes on that money, but you have up to three years to pay taxes on the additional money. (Here’s a breakdown of IRA tax brackets.)
• Some 401(k) plans allow account holders to take out money as an emergency loan. You may now be able to take out a loan for Covid-19-related purposes. Additionally, the IRS is allowing employers to increase loan amounts, and extend the payback period by up to one additional year. 
• The SECURE Act, passed in conjunction with the CARES act this spring, also extended the age limit for making contributions to some retirement accounts, and extended the age at which you are required to take something called a required minimum distribution, or RMD. Find out more about those changes here. 

You may be able to take out money from a traditional retirement account if Covid-19 has affected you in the following ways: 

• You, your spouse, or dependent are diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;
• You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;
• You experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or
• You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

For more details, check out the IRS guidance here. 

Save for your future

We understand that 2020 has been a hard year for everyone, but dipping into retirement savings prior to retirement should be considered as a last resort. That’s because retirement savings can benefit from time in the market, which can help you weather market volatility and potentially increase your gains through the power of compounding. 

It’s also important to keep in mind that it may take time to receive money from a retirement account, as the money is invested.

Remember, saving for retirement can be an important part of a comprehensive financial plan, which can also include setting short-term and long-term goals for your money. Short term goals can include creating a budget, setting up a savings account for unexpected expenses as they arise, as well as building an emergency fund with three to six months worth of expenses for unexpected life events such as medical bills or layoffs.Longer-term goals can include investing, and saving and investing for retirement. They are all part of the Stash Way, our philosophy for financial health.