How is 401(k) withdrawal affected by the CARES Act?
When the COVID-19 pandemic started to spread across the globe, the U.S. government knew it would have an impact on the American economy. Because millions of Americans are saving for their retirement using 401(k) accounts, it is understandable that the country was concerned about the impact of the pandemic on these accounts, especially those who are nearing retirement.
In an effort to help the nation’s citizens through the pandemic, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CARES Act had several provisions to help people through the pandemic, including a stimulus check for Americans initially affected by missing work. It also included provisions to help Americans who are concerned about their savings in 401(k) retirement accounts.
How does 401(k) withdrawal change with the CARES Act?
Traditionally, Americans are eligible to withdraw from their 401(k) accounts when they reach 59 ½ years of age. Making withdrawals any earlier than this would subject you to a 10% tax penalty. However, because Americans nearing retirement are concerned about how the volatile market during the pandemic will affect their savings, the CARES Act introduced some changes to this limit.
Until the end of 2020, you may make an early withdrawal up to $100,000 from your retirement account without penalty. The distribution for an early withdrawal in 2020 is subject to income tax to be spread evenly over 2021 and 2022. However, if you pay back the amount you withdrew within three years, it is eligible to be claimed as a refund.
Should I make an early withdrawal before 2020 ends?
Relatively few Americans have made early withdrawals from their 401(k) accounts this year. This is because an early withdrawal is more harmful for many than helpful, even if it is not subject to a penalty.
When you make an early withdrawal, you are essentially robbing yourself of any interest and wealth your savings can generate for your retirement nest egg. Additionally, you still have to pay taxes on your withdrawals as income unless you pay back the amount within three years.
Everyone’s situation is unique, and what is best for you depends on your individual circumstances. However, unless you are right up to nearing retirement, it is probably best just to leave your savings where they are and let the market stabilize itself as the pandemic nears an end. Even if you are nearing retirement, it may still be beneficial for you to let your savings stay where they are until you are eligible.
Talk to a ProVise CFP® professional about managing retirement finances
Deciding on what to do with your 401(k) savings during the best of times can be challenging, let alone during a pandemic. You want to keep your funds safe so you can enjoy a comfortable, long retirement. Our team at ProVise Management Group can review your retirement strategy and help you build a plan that is flexible to get your savings through good times and the bad.
Our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.
Are you ready to talk to a professional about your retirement strategy? Contact ProVise today to schedule a complimentary consultation.