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The Cares Act and Covid Relief - 401K No Penalty Withdrawal | Should You Do it?

Updated: Nov 3, 2020

This year will go down as one of the most uncertain, bizarre, and chaotic in the history of the world. A lot of people’s lives got turned upside down, especially on the financial front.

Today, we’re discussing the CARES Act, which was passed earlier this year to provide economic assistance to the American working class.

The CARES Act has brought some big changes to retirement plans, withdrawals, and loan provisions that apply only to 2020. That means you have a small window of time to possibly take advantage of it.

In this blog, we’ll cover exactly what the new provisions are, how they affect you & your finances, and also, my opinion & thoughts on them along with some strategies you can apply.

Who Qualifies for the New Provisions?

Before we talk about the updates and provisions that are made under the CARES Act one major point to understand is that you must qualify to get the benefits. For complete information on this topic, you can visit this page on the IRS website.

But real quick, here are some of the criteria that qualify you:

  • You have been diagnosed with Covid-19

  • Your spouse or your dependent has been diagnosed with Covid-19

  • You experience financial adversity due to quarantine, being laid off, or work hour reduction.

  • You can’t work due to lack of child care due to Covid-19

  • You experience financial adversity because of closing or reduced work hours of your business.

This is a very broad list that will allow most people to qualify.

Updates to Retirement Accounts and Loans

Let's begin with taking withdrawals;

1. Coronavirus Related Distribution (CRD)

With the CARES Act, you’re allowed to take what’s called a Coronavirus Related Distribution from your 401k, 403b, 457, or IRAs of up to $100,000 without having to pay the 10% withdrawal penalty. You will still owe regular income taxes but not the typical additional 10% IRS penalty.

There is also an option where you could choose to pay the taxes on your withdrawal evenly over a 3 year period. So for example, if you take $100,000 out of your 401k you can elect to have $33,333 taxable in each of the next 3 years (2020, 2021 and 2022), or you could just pay all the taxes for the 2020 tax year. This decision will obviously come down to your own personal situation.

Another major point with this distribution is that you could choose to put the money back within a 3 year period and not pay any taxes on it. You can "rollover" the funds back into the same account or into an IRA if you choose. You can also roll it over on a monthly basis, in chunks, or however you want to do it.

Even if you can’t pay the whole thing back, you can pay a portion of it and go back and amend the 2020 tax returns and get the taxes back. Pretty interesting, right!

Also, the 20% mandatory withholding that you have to typically withhold when you take a distribution is waived. So if you take $100k out of your account, you’re getting a check for the full $100k.

2. Loans Changes

Let’s talk about changes in loans now. Typically, when you take a loan from your 403b or 401k plan, you could take up to $50,000 or 50% of your account value, whichever is less. This changes for 2020. Now you can take up to $100,000 or 100% of your account balance, whichever is less.

Typically when you take a loan, you have a 5 year repayment period, but now you don’t have to make any payments for the first year. After that first year, the normal 5-year repayment schedule begins.

An important point is that not all employers are on board with these changes. So before you plan anything out, make sure to call your employer and see what is available to you.

Our tip here would be to only take a loan when you’re 100% sure that you will be able to pay it back. Because if you take the loan in 2020 and then in 2021 you couldn’t repay, it will become a taxable distribution and you’ll owe a 10% penalty.

A New Opportunity

A new opportunity that has presented itself through all of this is that if you have a very high-cost 401k or 403b plan, you can take a coronavirus related distribution of up to $100,000 and then roll it over into a low-cost IRA.

You will not pay any penalty on the withdrawal, neither will you owe any taxes because you put all the money back into a qualified account.

And what you’ve done in turn is you got the money out of a high-cost account that was very hard to access in normal times, and put that money into a low-cost IRA that offers easier access to your cash in case something comes up in the future.

Obviously, you can only do this if you’re qualified to take a CRD. So keep that in mind.

Opinions on if You Should do it?

Okay, so we talked about the changes and unique new opportunities. But the question is, should you do it? Let’s try and answer that.

First of all, if you’ve been laid off or are in a dire need of money right now, then this was created to help you get through. This is a great option for those struggling to pay the bills right now. Yes, you might owe taxes and it’ll reduce your savings for the future but sometimes things are out of your control, and you have to do what you have to do to get by.

On the other hand, if things do turn around for you and you get yourself into a better position, you have the opportunity to put the money back. So that’s another good thing.

If you’re not in a dire need, and you think you can get by without needing any extra help, then don’t do it.

If you’re looking to roll over your money from a high cost plan to an IRA, then this presents a unique opportunity.


So to conclude, the CARES Act brings relief and access to money to many of us who need financial help to survive in these unstable times. Don't feel bad about yourself if you need to take advantage of it. Also, if you qualify and were looking to roll over your money from one account to another, then this is the best time to do so.

Make sure to head over to to learn about joining our membership program where you can work 1-1 with me and start your journey of becoming great with money!


Rich McCormack, CFP®


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