CARES Act erases penalties from tapping 401K

Published: May. 6, 2020 at 9:28 PM CDT
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Many people are struggling financially due to impacts from the novel coronavirus.

Stipulations in the CARES Act are allowing people to tap into money previously holding penalties.

The CARES Act offers people the opportunity to access their retirement funds without penalties in certain situations.

The CARES Act was introduced to provide emergency assistance to those impacted by COVID-19. Through the Act, people can access their 401K or retirement funds without the previous 10% penalty tax even under the age of 59 and a half.

"They're allowing withdrawals if you are affected by, they call it a CRD-- a coronavirus related distribution. So, if you're affected by this situation financially, you can actually access your 401K money," Founder and CEO of Clear Financial Partners Tim Clairmont said.

The Act allows withdrawals of up to $100,000.

But, the question is-- should you?

"It should absolutely, 100% be the last resort. The reason being is that money is earmarked for retirement down the road. If you take money out of it now, all you're doing is making it harder to retire when you wanted it down the road," Securian Financial Advisor David Wald said.

Advisors say other options, like a 401K loan, might be wiser. And, the CARES Act is helping people out in accessing these loans.

"Normally, you're limited to 50% of the balance in your account or $50,000, whichever is less. In this case, they're letting you borrow up to $100,000 or 100%, again whichever's less," Clairmont said.

With a 401K loan, you'd be paying yourself back plus interest. So, the money would still be working for you toward retirement.

"Most 401Ks, while you're paying yourself back, are earning a fixed rate of return. So, the money, even though it's out in the form of a loan, is still earning a rate of return for you," Wald said.

In contrast, a retirement withdrawal that's not paid back will not earn anything and is forever gone.

For more information or guidance on accessing your retirement funds, you can contact a financial advisor, your accountant or banker.