The Most Effective Way to Cash Out Your 401(k) In 2020

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Individuals impacted by the COVID-19 pandemic can now withdraw up to $100,000 from their 401(k)s and IRAs with fewer penalties. Here’s how to do it in the most effective way.

In March 2020, the U.S. Congress passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act), an economic stimulus bill that provides $2 trillion of relief to individuals and businesses to offset the effects of the pandemic. Some of the provisions included in the bill make it easier for individuals to cash out their retirement funds early with fewer early withdrawal penalties.

Prior to the CARES Act, early withdrawals (for individuals under the age of 59½) from a 401(k) or IRA would be subject to a:

  • 10% early withdrawal penalty
  • 20% required federal tax withholding
  • Federal and state tax on the withdrawal

For example, if you withdrew $100,000 from a 401(k) without taking advantage of the the CARES Act, here’s what you would pay and receive:

Penalty or TaxAmount
Early Withdrawal Penalty
(10% of withdrawal amount)
Required Federal tax withholding$20,000
Additional federal taxes you will owe$5,000
State tax you will owe
(assuming 9% state tax)

Total You Pay: $44,000, Amount You Receive: $56,000. Results based on Wells Fargo’s Early Withdrawal Calculator.

Under the CARES Act, that same withdrawal would be considered a Coronavirus Related Distribution (CRD) and would not be subject to the early withdrawal penalty nor the required federal tax withholding. That’s an extra $30,000 in your pocket.

Here are some thing to consider before taking a Coronavirus Related Distributions.

What Exactly Is A Coronavirus Related Distribution (CRD)?

According to the IRS, a coronavirus-related distribution is a distribution that is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020, up to an aggregate limit of $100,000 across all plans and IRAs. Eligible retirement plans include section 401(k) and 403(b) plans, and IRAs.

What Are The Special Rules?

  • You can withdraw up to $100,000 across all from eligible 401(k)s and 403(b)s and traditional IRAs.
  • The 10% additional penalty on early distributions does not apply to any coronavirus-related distributions.
  • There are no mandatory withholding requirements but you still have to pay taxes.
  • You have the option to include the entire distribution in your 2020 taxable income or ratably over a three-year period, starting in 2020. For example, if you receive a $30,000 coronavirus-related distribution in 2020, you would report $10,000 in income on your federal income tax return for each of 2020, 2021, and 2022. If you pay back the distribution within three years, you can claim a refund on those taxes.
  • Loans are available for 401(k) plan participants up to 100% of their vested balance (previously 50%) as a loan up to $100,000. Payments on the loan are deferred for one year.

Who Is Eligible For a Coronavirus Related Distribution?

It is optional for employers to adopt the distribution and loan rules of the CARES Act so make sure you check with your employer before taking a CRD.

If your employer opts in to CRDs under the CARES Act, you will be eligible for a CRD if you, your spouse or a member of your household experienced adverse financial consequences caused by COVID along with any of the following:

  • Diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
  • Been quarantined, furloughed, laid off, or have work hours reduced
  • Cannot to work due to lack of child care; or
  • Own a business that has closed or reduced hours

Should I Take A Coronavirus Related Distribution?

Assuming you’re eligible for a CRD, there are a few things to consider before taking a distribution.

Accounting For The Distribution

If taken, the CRD will need to be reported on your tax return in 2020 and possibly for the the next two years as well. Choosing to recognize all of the income in one year can move you into a higher tax bracket. By spreading it over three years, you’ll have more time to repay it while minimizing the tax impact. Spreading the income recognition of the distribution over three years can become very complex from a tax perspective. It can lead to penalties if not reported correctly. It is always best to discuss the distribution with a qualified CPA. Contact our team of CPAs to discuss matters related to these distributions.

Future Impact On Your Retirement Account

Compound interest is a powerful tool. It allows money to grow faster when the principal or starting amount is higher. By taking a coronavirus related distribution you are effectively lowering your principal and harming your future earning potential. Even if repaid in three years, you will be forgoing the potential gains on the portion of your account that was withdrawn.

Taking a CRD may be right for you but it should factor into your year end tax plans. If you have questions or would like to discuss tax or accounting matters with us, please email us at or call us at (347) 201-2045.

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