The CARES Act Retirement Account Withdrawal Rules: Should You Take Money Out?

This has been a year like no other. 

A pandemic has engulfed the world. Unemployment rates in the United States have jumped to the highest they’ve been since the Great Depression. 

The United States government recently passed the CARES Act, which offers many financial breaks to Americans including a stimulus check and a hiatus on student loan payments for six months. 

It also offers Americans the chance to take money out of their retirement account with fewer penalties than normal. 

But just because you can, should you take money out of your retirement under the CARES Act?

What Are The CARES Act Retirement Account Withdrawal Rules?

If you choose to take money out of your retirement under the CARES Act, there are a few details you should know. 

Have You Been Affected By COVID-19?

To  be eligible to withdraw money from retirement under the CARES Act, you must have been affected by COVID-19 in some way, whether that be you or an immediate family member being diagnosed with COVID-19 or having experienced a lay off or reduction in hours because of the pandemic.

No 10% Penalty

When you withdraw money from your retirement account, you must pay a 10% penalty if you’re under 59.5 years old.  The CARES Act eliminates this penalty.

Flexibility With Paying Taxes

In ordinary times, when you withdraw money from retirement, you have to claim that money on your next tax return. However, under the CARES Act, you have up to three years to claim the money on your tax return. That means if you withdraw $24,000, you can claim $8,000 on your tax return for each of the next three years.

Flexibility To Redeposit Money

Normally, when you withdraw money, you need to pay it back within 60 days if you don’t want to claim it on your taxes. However, under the CARES Act, you have up to three years to pay back the money and thus not face a tax penalty.

The Withdrawal Amount

Any person is allowed to withdraw up to $100,000 from their retirement account(s).  This is per person, not per account.

This Year Only

All of the rules stated above apply only to this year. Next year, unless the government intercedes, the rules for pulling money from your retirement account go back to normal.

Should You Withdraw Money?

The question is, should you take money out of your retirement account under the CARES Act?  This is a difficult and personal decision to make. 

Drawbacks To Taking Out Money

Obviously, if you take money out, you lose the ability to earn interest on that money and further grow your retirement savings.  For that reason alone, you should think carefully about withdrawing money because you may be irreparably harming your financial future.

Also, although you don’t have to pay a penalty for taking money out in these circumstances, you do have to pay taxes.  Depending on the amount you take out and your income bracket, the tax bill could be large.  This may be a hardship to pay at tax time.

Why You Should Take Money Out

If you’ve been financially hit by the pandemic and have utilized all options to help you make ends meet and are still struggling, then you may want to consider taking money out of your retirement.  If you do take the money out, make sure to take out the minimum you need, so you do the least damage possible.

Second, remember that these special rules are only in effect for this year, so if your hours have been reduced and you think they may be reduced further next year, you may want to take money out at the end of this year.  If you have the discipline, you can keep the money in savings.  If you don’t need it, simply pay it back.

Withdraw From Your Retirement Accounts, But Only If You Need To

This pandemic has affected people from all walks of life in a variety of ways.  If you’ve been directly impacted by COVID-19, you do have the ability to take money out of your retirement account penalty free and with more flexibility than at any other time.  However, only take this option if you have to.