If you are following what’s going on in the world today, you may know that the CARES Act is a $2 trillion stimulus package to help American during the COVID-19 pandemic. In addition to stimulus checks and expanded unemployment benefits, there are provisions related to retirement plans. This will allow you to use $100,000 penalty free from your IRA or other plan. A Hardship IRA distribution can be taken if you have been affected due to the coronavirus.

Hardship IRA Distribution

Under normal circumstances, you are not permitted to withdraw IRA funds early, without facing penalties. If you are under age 59 1/2, you will be assessed a 10% early withdrawal penalty. However, thanks to the CARES Act, that penalty is waived. You may withdraw up to $100,000 penalty free from your IRA. Obviously, any amount over that, will be penalized if you are under 59 1/2.

Therefore, if you wish to withdraw $10,000 to deal with expenses, you will get the entire amount. Because of the normal penalty, you would only receive $9,000 if you take an early distribution. That’s huge news for those that don’t have cash on hand to get by during these trying times.

Further, taxes can be spread over a three year period. Before the CARES Act, any amount withdrawn during the year will be taxed then next time you file your tax return. This is quite helpful if the amount withdrawn would bump you into a higher bracket if it was taxed all at once. It’s generally best to spread the taxes out over the allowable period.

There is one more important provision related to hardship IRA distributions. You are allowed to re-contribute the the entire amount withdrawn and owe ZERO taxes! Again, you have three years to pay back the distributed amount. Contributions can be made in excess of the annual IRA contribution limits.

For example, you withdraw $10,000 from your IRA and contribute the entire amount to any retirement plan within three years – you owe no taxes at this time. If you choose to re-contribute half that amount, then you will be taxed on the remaining $5,000.

How to Take Advantage

To take advantage of the Hardship IRA distribution rules in the CARES Act, you must show you have been affected by COVID-19. As per the IRS, an eligible distribution is one made to someone:

• who is diagnosed with SRS-COV-2 or COVID-19 by a test approved by the CDC,
• whose spouse or dependent is diagnosed with one of the two diseases, or
• who experiences adverse financial consequences as a result of being quarantined, furloughed

Therefore, it should be fairly easy for someone to prove they have been affected. Anyone has had their salaries cut or jobs eliminated will qualify for the distributions set forth in the Act. We hope everyone reading this remains healthy. That is the most important thing. There’s always a way to fix your finances, but not your life!

Should You Take a Hardship IRA Distribution?

Again, under normal circumstances, it’s never a good idea to dip into your nest egg early. However, these are not normal times! If you need to tap your IRA (or other plan), the IRS has made it easier for you. Many retirement plans invested in traditional assets are down right now. Withdrawing funds now, will be at a loss. If at all possible, you should try to ride out the storm via other means.

One option, if it’s available to you, is to take a loan from your 401(k) plan. You may borrow up to $100,000 if your plan documents allow for it. Interest rates are low, and those payments will be made back into your plan. A loan gives you the incentive to pay back the funds withdrawn. A distribution does not need to be paid back. Many people will not return the funds to the plan, even though taxes will not be taken if done so.

In the end, it’s up to you to do what is best for yourself and your family. If you have no other options, a hardship IRA distribution should be considered. If at all possible, you should pay back as much as you can in the coming years.

The Last Word

Nearly the entire country (and world) have been affected in some way by the coronavirus. The government knows they need to help out all Americans. The ability to take a penalty-free hardship IRA distribution will be a great help to many. It’s up to you to decide if and how much you may need to withdraw. It is also up to you to ensure your retirement planning remains on track. It’s best to speak with a financial advisor to make sure!

If you have any questions about the hardship IRA distribution rules, please give us a call at 800.472.1043!