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August 11, 2020 / F&M Trust
Read this before cashing out your retirement account due to COVID-19

Read this before cashing out your retirement account due to COVID-19

The Coronavirus Aid, Relief and Economic Security (CARES) Act offers a provision to soften the economic impact from COVID-19. It authorizes the withdrawal of up to $100,000 from IRAs, or 401(k) retirement accounts, without penalty.

Under normal circumstances, the penalty for withdrawing from a 401(k) before the age of 59.5 would be 10 percent of the withdrawal, plus 20 percent for taxes.

smart phone screen with finger tapping a coin app iconBut that changes under the CARES Act, which Congress passed to provide financial relief to Americans affected by the COVID-19 crisis.

Here’s an overview of the rules for tapping into your retirement account this year:

  • The 10 percent penalty will be waived for any COVID-related withdrawal.
  • To qualify, you, your spouse or a dependent must have either been financially impacted by, or tested positive for, COVID-19. An impact includes being furloughed, having work hours reduced or being unable to work due to lack of childcare.
  • Withdrawals have an aggregate limit of $100,000 from all plans and IRAs.
  • While you will still owe income tax on your withdrawal, you can pay that tax over a three-year period. But if you repay the withdrawal within three years, you could recover the tax already paid by filing an amended tax return.
  • You may use the money however you wish.
  • COVID-related withdrawals are only in effect for 2020.

For additional information, please visit the IRS website.

Please note that not all plans qualify for COVID-related withdrawals, and employers can choose whether to participate. Consult with your employer before making a withdrawal.

Bottom line

Rightly regarded as a serious decision, tapping into your retirement is, and should be, a last resort. However, if taking a COVID-related withdrawal is your only option, take what you need and no more. After all, your retirement account is your financial safety net for later in life.
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