CARES Act has provisions for retirement account withdrawal penalties
Wednesday, April 22, 2020
Building financial accounts is an important priority for many people moving toward retirement. While those reserve funds grow, financial management experts typically agree it’s important to be patient and not withdraw early.
However, job loss and income reduction during the COVID-19 pandemic have left some families in dire straits, said Cindy Clampet, Oklahoma State University Extension assistant resource management specialist. Those circumstances are prompting further consideration with new options on the table.
“Generally, when a person taps into a retirement account ahead of schedule, they have to pay penalties and taxes,” Clampet said. “However, the Coronavirus Aid, Relief and Economics Security Act that passed in late March includes provisions regarding taking withdrawals from retirement accounts without penalties.”
In order to qualify for withdrawals without penalties, Clampet said a person must be diagnosed with the COVID-19 virus; have a spouse or dependent diagnosed with the COVID-19 virus; be suffering financial hardship because of job or income loss because of mandated business closures or quarantine; or be a business owners whose business has suffered financial loss because of business closure or quarantine.
With the CARES Act in place, qualifying consumers with retirement plans such as an IRA, 401k or a 403b can withdraw funds without paying the 10% penalty and the 20% withholding tax. However, federal and state income taxes will still apply to the withdrawn amount.
The taxes can be paid over a three-year period or, if borrowers choose, they can repay the borrowed amount within three years.
The maximum loan limit for borrowing from a retirement plan has been increased to $100,000. Clampet said if a person previously borrowed from a retirement account and is making payments, those repayments are deferred for one year.
“This is good news for people who need to access their money for a financial emergency, but I would encourage consumers to use this opportunity as a last resort,” she said. “It’s still recommended to keep retirement money invested in order to take advantage of the growth that will occur when this pandemic ends and the economy begins the recovery process.”
To withdraw funds from a retirement account, contact a financial advisor at the investment firm which holds the account.
For more COVID-19 information from OSU Extension, please visit https://extension.okstate.edu/coronavirus.html.