By Sonya Sellmeyer, Consumer Advocacy Officer for the Iowa Insurance Division
The Coronavirus Aid, Relief and Economic Security Act of 2020 (CARES) provides financial relief due to the effects of COVID-19 to individuals, families, state, local, and tribal governments, small businesses, and American industries. One of the provisions for individuals includes the possibility to withdraw or obtain a loan from qualified (usually offered by an employer) retirement investments without the standard penalties imposed. This provision of CARES is temporary and employer plans may opt out this provision.
You may qualify for a withdrawal or loan from your qualified retirement plan or traditional IRA if:
- You, a spouse, or dependent have been diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention, and you suffered financially due to the quarantine, employment reductions, or lack of child care as a result of the coronavirus.
- Additionally, those who own individual businesses may be eligible if their business closed or had a reduction in hours due to coronavirus.
What are the retirement provisions under the CARES ACT?
- CARES temporarily waives the 10% early withdrawal penalty and 20% withholding for distributions taken from your qualified retirement plans and IRAs. You must meet qualification requirements, and your employer’s plan must offer the relief.
- If eligible, you can take up to $100,000 across all your qualified plans or loans up up to $100,000 or 100% of the account if your vested balance is under $100,000. Loans must be taken within 180 days of March 27, 2020.
- Distributions will be subject to taxation and you will have three years to pay the taxes. Before making any distributions, please consult your tax advisor.
- Distributions may be paid back to the qualified plan within three years.
- Additionally, CARES may allow you to suspend prior loan payments on a qualified retirement plan from March 27 through December 30, 2020.
- Find guidance on taking distributions or loans from your retirement plan under CARES at the IRS Website.
Before withdrawing money for investments, first consider the following:
- Consult your tax advisor.
- A retirement account is your future paycheck. Only tap into these funds as a matter of last resort.
- Retirement savings will lose out on significant compounding growth with less money in your account(s).
- Beware of fraudsters who tempt you with the latest get rich quick schemes to solve your problems.
- Turn down aggressive and high pressure sales tactics that prey on your emotions and Double-Check Before You Invest to ensure your financial professional is properly licensed.
Before taking any extensive measures with your retirement accounts, be sure to evaluate your financial situation, examine all other options first, and consult a tax and licensed financial professional.