Congress Makes It Easier to Take Emergency Cash From Retirement Plans

Some provisions of the CARES Act allow people to take cash out of retirement plans and accounts during the crisis with fewer restrictions and penalties than usual. Keep in mind that a retirement plan might not make the new flexibility available to its participants. The employer sponsoring the plan decides whether or not to adopt these provisions.

The plan might have to amend its documents to include the new rules. A special rule in the CARES Act allows retirement plans to amend their rules to include these new provisions and have them go into effect immediately. Normally, amendments to a plan can be effective only in the next plan year.

One provision of the CARES Act waives the 10% penalty on an early distribution from a retirement plan when the distribution is taken for coronavirus-related reasons.

The penalty ordinarily is imposed when a retirement plan participant takes a distribution before age 59½ and the distribution doesn’t qualify for one of the existing exceptions to the penalty.

Now, the penalty is waived if the individual taking the distribution is diagnosed with COVID-19, has a spouse or dependent diagnosed with it, or experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, or being unable to obtain work because of a lack of child care or a business closing. Even when the 10% penalty is avoided, the distribution is included in gross income.

But under the CARES Act the distribution may be included in in-come over a three-year period instead of all in the year of the distribution.

Also, a distribution normally can’t be returned to the retirement plan, unless that is done within 60 days. Otherwise, a return of a distribution would be an excess contribution to the plan. But under the CARES Act, the coronavirus-related distribution can be re-contributed to the plan within three years.

It can be re-contributed to the same plan from which it was withdrawn or contributed to another plan of which the individual is a participant at the time of the re-contribution.

Annual retirement plan contribution limits won’t apply to the re-contribution This provision applies to IRAs as well as 401(k)s and other defined contribution retirement plans.In another CARES provision, the amount that can be borrowed from a retirement plan is increased.

(Loans can’t be taken from IRAs, only from employer retirement plans.)The normal maximum amount of a retirement plan loan is the lesser of $50,000 or 50% of the participant’s vested account balance. That limit is increased for the 180 days that begins with March 27, the day the CARES Act became effective.

The maximum loan amount is doubled to the lesser of $100,000 or 100% of the participant’s vested account balance. There’s an additional benefit for anyone who had an outstanding retirement plan loan as of March 27, 2020. Payments due on those loans through December 31, 2020, are deferred for one year.

The waiver of the penalty on early distributions and increase in allowable loan amounts doesn’t mean taking advantage of those provisions is a good idea. It is best to save your retirement account balances for your retirement years until all other options have been exhausted. It is difficult to make up for early spending of retirement savings.