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401(k) CARES Act Distribution Options

Date: April 14, 2020

The impact of the COVID-19 crisis has been devastating for many of us.  In some cases, the impact of illness or reduced schedules is creating challenges that many of us may not have foreseen earlier in the year.  As we know, the CARES Act has put a number of safety nets in place to assist us during this downtown not the least significant of which is access to our retirement funds.  Having said this, while access to these funds have been easier for those requiring a “coronavirus related distribution”, we strongly recommend that you make every effort to avoid using retirement funds because of the impact it can have on your long-term retirement planning.  

Normally, tax law restricts access to retirement funds for nonretirement purposes. Because these are not “normal times” and as a result of two major changes, access has been made a bit easier.  Cash for current expenses can be accessed as a result of the waiver of certain penalties for withdrawing from an IRA or 401(k) distribution as well as an opportunity to take enhanced plan loans.  Whether or not you should take advantage of the opportunity really depends on your unique set of circumstances.

The coronavirus stimulus, formally called the CARES Act, allows you to withdraw up to $100,000 from a retirement account (IRA, 401(k), etc.) without having to pay a 10% penalty - even for those who have not attained age 59½. Current legislation makes it clear that you can only do this if you have something called a “coronavirus related distribution” (CRD). 

A CRD is any distribution by a person who has been diagnosed with COVID-19 (or SARS-CoV-2), their spouse or dependent. In addition, even undiagnosed people can take a CRD if they have adverse financial consequences because of being quarantined, furloughed, laid off, given reduced hours, or were unable to work because of child care responsibilities brought about by the current crisis. In addition, business owners who have closed the business or reduced hours also are eligible for a CRD.

In addition to avoiding the 10% penalty, you will be eligible to pay the ordinary income taxes on your distribution over three years (but you may elect to pay it all at once). It is important to note that you are not required to recontribute funds. In fact, financial planners may suggest that even if you are inclined and able to restore savings you recharacterize your retirement savings, so they are in position to get Roth treatment.

For more information, call the Fidelity Service Center for United Employees at 800-245-9034. Representatives are available Monday through Friday, 7:30 a.m. to 11 p.m. CT. Extended call wait times should be expected.

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