The CARES Act allows you to tap retirement savings — but should you?

3 min read
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With tens of millions of Americans out of work because of the coronavirus, several economic rescue packages have been put into place to help individuals and businesses survive the pandemic. The most generous – the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, signed into law on March 27 – provides help for American workers and families, small businesses, big corporations, state and local governments and public health.

Most Americans are receiving a $1,200 payment plus $500 for each child under age 17. The CARES Act also offers small businesses the opportunity to apply for loans under the Paycheck Protection Program, or PPP. These loans can be forgiven if spent on payroll and operating expenses. Plus, a new $484 billion coronavirus relief package designed in part to help more small businesses get loans was signed into law April 24.

Help for retirement savers

The CARES Act offers help to retirement savers in a couple ways:

  • Waived RMDs in 2020: Retirees won’t have to take required minimum distributions from their tax-deferred retirement accounts in 2020. This is a welcome exception to the RMD rule, especially for those who saw their assets plunge in value because of stock market volatility and would like to avoid selling them at lower prices. The change applies to everybody, including those who turned 70 1/2 last year and who hadn’t taken a distribution before the beginning of 2020.
  • Penalty-free access to retirement savings: Retirement savers can raid their IRA or 401(k), if their plan permits, to the tune of $100,000. The 10 percent penalty for early withdrawals taken by those under age 59 1/2 is waived for distributions from both IRAs and 401(k)s, as well as the latter’s defined contribution cousins, such as 403(b), 457 and other such tax-deferred plans. These withdrawals must be made before the end of 2020.

To qualify for this access to your retirement savings, you must meet one of these criteria:

  • You experienced a layoff, furlough or reduced hours due directly or indirectly to the coronavirus.
  • You or a member of your household received a COVID-19 diagnosis.
  • You cannot work because you need to care for your child.
  • You had to close your business or reduce your hours due to the pandemic.
  • You suffered adverse financial consequences related to COVID-19.

Taxes for distributions can be paid over three years, or you can repay the amount withdrawn within three years, in addition to making the maximum contribution amount allowed each year.

The upsized $100,000 limit also applies to loans, if your retirement plan allows. Such loans must be taken within six months of March 27, 2020, and they don’t have to be related to the pandemic. Any loans you may have already taken out that come due before the end of this year don’t have to be repaid until 2021. The old rules limited loans to a maximum of $50,000 in certain circumstances. Generally, loans are not allowed with IRAs.

Is tapping your retirement fund a good idea?

Greg McBride, CFA, Bankrate chief financial analyst, says taking money out of your retirement savings should be your last option.

“Tapping into your retirement account should truly be an absolute last resort,” he says. “The $10,000 withdrawal you make today could cost you $57,000 in retirement savings 30 years from now – and that doesn’t even account for the tax hit you take on the money withdrawn this year.”

McBride suggests considering other sources for funds. “Use whatever emergency savings you have. Get forbearance or other payment relief on your mortgage, car loan, credit cards and student loans. Aggressively cut household expenses, even if just temporarily. Draw down your home equity or personal line of credit. And borrow from family members or friends before even thinking about tapping your retirement account early.”

If you must tap your account, McBride says, withdraw your own contributions from your Roth IRA since this would be a tax-free and penalty-free move.

Steve Parrish, co-director of the Center for Retirement Income at The American College of Financial Services, shares similar advice. “Yes, you can get the money, and yes, you can pay it back,” Parrish says. “But that’s your retirement income that you’re essentially taking out. And that’s lost opportunity.”

Adds Parrish: “People forget they have cash value in life insurance. That’s an easy one. You don’t have to do anything other than say, ‘Send me some money.'”

He also suggests applying for a loan from a bank or credit union. “That way you’re not tying up your retirement capital.”

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