Not only are you able to make a penalty-free distribution, but you can pay the income taxes on the distribution over three years. This means that the CARES Act eliminates the 20% automatic withholding that is used as an advance payment on taxes you may owe.

The law states that you can do this if you have coronavirus-related distribution (CRD). CRD refers to any distribution by a person who has been diagnosed with COVID-19, their spouse or dependent. However, you do not need to have a diagnosis.

People can take a CRD if they have had any adverse financial consequences because of a quarantine, furlough, being laid off or reduction in work hours, or were unable to work because they needed to care for their children during the pandemic. In addition, if you are a business owner and had to close or reduce your hours, you are eligible.

If you decide to make a withdrawal, you will have three years to pay it back (although not required). In these three years, you will not be subject to IRS annual contribution rules because your repayment(s) will be treated like a rollover.

Retirement Loan Relief

A retirement plan loan is different than a withdrawal. The CARES Act also provides an additional year for repayment of loans from eligible plans (not including IRAs) and changes the loan limits.

If you had a retirement plan loan outstanding on March 27, 2020, and any repayment on the loan was due from March 27 to Dec. 31, 2020, that due date may be delayed for up to one year. Any payments during this suspension will be adjusted to reflect the delay and any interest accruing during the delay. The loan limit from a qualified retirement plan for new loans also is increased to $100,000 from March 27 to Sept. 22, 2020.

Making a Decision

The information provided above is based on IRS rules and is intended to be educational. It is not intended to persuade you to withdraw money from your retirement account. You need to weigh the pros and cons of making a withdrawal or taking a loan. You may be withdrawing from a fund that has lost value during the pandemic. If so, you are limiting its ability to grow and regain its value when the market rebounds.