If you are experiencing financial hardship due to the coronavirus pandemic, you may want to consider withdrawing money from your retirement account while you still can. The special exemption allowing early withdrawals without a penalty ends soon.
The CARES Act
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed in March 2020. The CARES Act allows individuals adversely affected by the pandemic to make hardship withdrawals of up to $100,000 from retirement plans this year without paying the 10 percent penalty that individuals under age 59 ½ are usually required to pay. This exemption is only for withdrawals made by December 30, 2020.
If you decide to withdraw money from your retirement account, you will still have to pay income taxes on the withdrawals. Although, the tax burden can be spread out over three years. If you repay some or all of the funds within three years, you can file amended tax returns to get back the taxes that you paid.
To qualify for the exemption, you must meet one of the following criteria:
- You or a spouse or dependent have been diagnosed with COVID-19
- You or your spouse have suffered financial hardship due to the pandemic
- Examples include: a job offer rescinded, reduced pay, business closed, or inability to work due to lack of childcare
Consider the Drawbacks of Withdrawal
This step should not be taken lightly. Withdrawing money now means your retirement funds will be reduced. Additionally, withdrawals may limit the retirement plan’s ability to grow. However, for some, it may be the best option to pay bills and avoid running up high-interest credit card debt.
For information from the Consumer Financial Protection Bureau on how the withdrawal exemption works, click here.
