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Things to Consider Before Taking a 401(k) Distribution Due to COVID-19

November 22nd, 2020 | Written by

Things to Consider Before Taking a 401(k) Distribution Due to COVID-19The Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law on March 27, 2020, eases restrictions for retirement plan participants impacted by coronavirus to access their 401(k) and IRA funds (up to $100,000).

Eased restrictions

Before the CARES act, if a participant under 59½ wanted to tap into their 401(k), they were subject to a 10% early withdrawal penalty and a 20% federal income tax withholding. Now, COVID-19 related distributions that fall under the CARES Act must occur before December 31, 2020, and will:

  • Waive the 10% early withdrawal penalty
  • Reduce the federal income tax withholding from 20% to 10%
  • Allow participants to pay taxes on the income over a three-year period
  • Allow participants to repay the distribution into the plan over a three-year period from the distribution date.


If a participant wishes to take a distribution of up to $100,000 under the CARES Act, they must satisfy one of the following criteria:

  • The participant, spouse, or dependent has been diagnosed with COVID-19 and shows a positive test from a CDC-approved test.
  • The participant experiences adverse financial consequences due to being quarantined, furloughed, laid off, experienced reduced work hours, or is unable to work due to lack of childcare because of the pandemic.
  • For business owners, shutting down their business or reducing hours.

Is it a good idea to take a distribution from your 401(k)?

Your 401(k) should always be your last resort after you have exhausted all other options, such as your emergency fund or additional savings.  Before you consider taking from your 401(k), here are a few things you should consider first.

  • Are you selling investments at a bad time to raise cash? Selling your investments during a market downturn will likely result in a greater loss in your portfolio.
  • You still have to pay taxes on that distribution. Even though the CARES Act waived the early 10% penalty and mandatory federal taxes at the time of distribution, you still have up to three years to pay income tax on the distribution.
  • Is taking a loan from your 401(k) a better option for you? While repayment isn’t required for a distribution, it is required for a loan. Usually, a participant has five years to repay the loan from his or her 401(k).  However, all loan payments due in 2020 can be delayed up to one year from the loan date.

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    This information is intended for educational purposes only. It is not intended to provide any investment advice or provide the basis for any investment decisions. You should consult your financial advisor prior to making any decision based on any specific information contained herein.

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