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CARES Act Planning Tip: 401(k) Loans

By Kathryn McCall

As our economy continues to struggle through this unprecedented Global Pandemic, we at GBB want to make sure that our friends and neighbors are aware of some of the resources that the Coronavirus Aid, Relief, & Economic Security Act (CARES Act) included in it to help individuals better manage the economic fallout of COVID-19.

Many Americans are seeing their savings dwindle and are wondering, “what do I do now?” For those who have been laid off, furloughed, or are unable to work since their kids are out of school, it is important that you understand your options. 

If you have already depleted your emergency fund, it might be time to consider borrowing assets in your retirement account – like an employer’s 401K plan – to help pay your expenses. Although this should be thought of as a last resort option, the CARES act has changed the rules when it comes to taking loans from a 401(k) or other employer sponsored retirement plan.

Who qualifies for a Corona Virus Related Distribution? 

  • Any individual who tests positive for COVID-19, whose spouse tests positive for COVID-19, or whose dependent tests positive for COVID-19.  Or,
  • Any individual who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, 
  • Or other factors as determined by the Secretary of the Treasury (or the Secretary's delegate).

How much can I take as a loan?

This provision allows for 401(K) plan participants to take as a loan against their own 401(K) savings up to $100,000. This doubles the previous the maximum loan amount from $50,000 to $100,000. In the previous loan rules, a participant could only take 50% of their vested balance or $50,000 whichever is less.  The CARES Acts allows qualifying participants to borrow up to 100% or the vested plan balance or $100,000 whichever is less. 

What if I already have a 401(K) loan? 

Any payments that would otherwise be owed on the plan loan from the date of enactment through the end of 2020 may be delayed for up to one year.

What is difference between a loan and a hardship withdrawal? 

If you need funds quickly the hardship withdrawal is another option in which you incur a taxable income in the amount of the withdrawal. For those who qualify for a Corona Virus Related Distribution, the Cares Act waives the usual 10% early distribution penalty as well as the mandatory 20% Federal tax withholding requirement. While this option may sound appealing, it is important to consider the potential long-term impact of a withdrawal to your retirement plan’s balance. One study by Fidelity showed the long-term impact of a 45-year-old taking a $15,000 loan or withdrawal from an account balance of $38,000. If they take the withdrawal, they estimated a potential loss of *$66,812 future savings versus taking the loan. 

It is important to note that not all employer plans have adopted the CARES Act provisions. We urge you to reach out to your employer’s retirement plan provider directly to learn more about your specific options. We understand that this is a stressful time, if you have any questions feel free to reach out to your GBB advisor. 

*For details on Fidelity’s study:https://www.fidelity.com/viewpoints/financial-basics/avoiding-401k-loans

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