If you’re out of work and need income, you might be considering withdrawing from your retirement savings. Normally, if you withdraw money from traditional Individual Retirement Accounts (IRA) and employer-provided accounts before reaching age 59 ½, you have to pay a 10 percent early withdrawal penalty.

Furthermore, withdrawals from your current employer-provided plans are limited to an amount needed to meet a limited set of approved hardships, like avoiding foreclosure, home repairs after a disaster, or medical expenses.

If you’ve experienced hardship as a result of the pandemic, temporary changes to the rules under the CARES Act may give you more flexibility to make a withdrawal from tax-deferred retirement accounts during 2020.

Please note that this blog discusses withdrawals from retirement plans—not retirement plan loans. You may want to spend some time weighing the risks and benefits to withdrawing money versus taking a loan. Learn more about taking a loan from your retirement accounts .

What tax-deferred accounts are affected by the changes?

  • a traditional IRA
  • an employer-provided retirement plan such as a 401(k) or 403(b) or other types of defined contribution plans.

Please note that employers and plan sponsors have to opt in by agreeing to follow the CARES Act provisions. Many employers are not offering the option.

How do I qualify for the exemption?

  • You, your spouse, or dependent was diagnosed with COVID-19 by a CDC-approved test , OR
  • You experienced adverse financial consequences as a result of certain COVID-19-related conditions, such as quarantine, lay off, furlough, reduction in hours, the closing or reduction of your business, an inability to work due to lack of childcare, or other factors identified by the Department of Treasury .

coronavirus-related distribution  is one that meets this criteria and is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020.

How much can you withdraw without penalty?

You are allowed withdrawals of up to $100,000 per person taken in 2020 to be exempt from the 10 percent penalty. If you have more than $100,000 in one of these retirement accounts, note that it is $100,000 per person and not per account. You can’t take out more than $100,000 total from all of your accounts. Withdrawals from an employer-based account are only possible if the employer agrees to this option under the CARES Act.

Please note that the CARES Act eliminates the 20 percent automatic withholding that is used as an advance payment on the taxes that you may owe on employer-provided plans like your 401(k). This 20 percent withholding is not a requirement when you cash out or withdraw from a traditional IRA plan. So, you may not want to spend the full amount you withdraw because you might owe some of that money in taxes later.

Will the full balance be available to you?

If you are withdrawing from an employer-based account and are relatively new to your job and are not considered fully-vested for retirement purposes, the portion of the funds that were contributed by your employer may not be available to you. Even if you are fully vested, your employer may not allow you to access that portion of your account. Remember, you can’t take out more than $100,000 total.

How long will it take to get the money you withdrew from your accounts?

Regardless of how much you can access, you should know that withdrawing money from a retirement account is not as simple as transferring money from a savings to a checking account. The process could take several weeks. If you need the money for something time-sensitive, give yourself at least a two-week buffer in case paperwork gets delayed or is lost. Many companies are struggling to provide customer support via phone or online, and their ability to handle transactions may be limited as well. Talk to your plan provider or administrator about the steps and ask for an estimated timeline.

Is it better to withdraw from my retirement account now, or let it grow?

You may be withdrawing from a fund that has lost value during the COVID-19 pandemic. When you withdraw money from an investment portfolio in a “low” market, you are limiting its ability to grow and regain its value when the market rebounds. A $100,000 withdrawal today, at a growth rate of 5 percent, would grow to about $160,000 in 10 years without any additional contributions.

Possible tax consequences and ways to deal with them

There are possible tax consequences and different ways to deal with them. While the Act protects you from the 10 percent early distribution penalty, it does not exempt the withdrawn amount from taxes. The amount will be added to your annual income and taxed as such. If you don’t ask to have a percentage of the amount set aside for taxes when you withdraw, you could end up owing a lot when you file your 2020 taxes. The CARES Act distributes the tax burden over a period of up to three tax years, unless you choose not to, and lets you re-contribute some or all the funds that you withdrew by the third year. You may need to hire a tax professional to help you file. We are here to help, contact our office for assistance.