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Thinking about tapping your 401(k) due to Covid? Here's what you need to know

Thinking about tapping your 401(k) due to Covid? Here's what you need to know

10/21/2020 4:47:00 PM

Thinking about tapping your 401(k) due to Covid? Here's what you need to know

The CARES Act made it much easier for Americans to draw down their retirement accounts through coronavirus-related distributions or loans. Here's what to know before taking money out of a 401(k), according to participants at the 2020 CNBC Financial Advisor Summit.

9:45 AM EDT@csreinickeKey PointsThe CARES Act made it much easier for those impacted by the coronavirus pandemic to draw on retirement savings before age 59½.Here's what to consider before taking either a coronavirus-related distribution or a loan from a retirement account.

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Jamie Grill | Getty ImagesIf you've nearly drained your savings due to the coronavirus pandemic but have a retirement account, it's now easier than ever to draw it down.While taking money out of such an account before retiring is generally something financial advisors say to avoid, it may make sense for those who have been impacted by the crisis, including the millions of Americans who are unemployed, struggling to pay bills and cover basic expenses.

"We typically want to look at retirement accounts as last resorts, but I'm very fond of saying when you can't eat today, you'll worry about tomorrow, tomorrow," CPA and certified financial planner Jeffrey Levine told CNBC'sduring the CNBC Financial Advisor Summit. "Some people are unfortunately in that situation where this is it, this is the only asset they have left to tap."

What changed due to Covid-19The federal CARES Act, enacted in March, made it much easier for Americans under age 59½ to access the funds stashed in eligible retirement accounts, including employer-sponsored 401(k) plans, 403(b) plans and individual retirement accounts.

The CARES Act "was really about providing liquidity, and liquidity in a multiple of different ways," Megan Gorman, an attorney and managing partner at Chequers Financial Management in San Francisco, said during Tuesday's FA Summit.This year, you can take out up to $100,000 from eligible retirement plans without incurring the usual 10% early withdrawal penalty. In addition, people who make such a withdrawal have up to three years to pay the tax liability on the money taken out.

We typically want to look at retirement accounts as last resorts, but I'm very fond of saying when you can't eat today, you'll worry about tomorrow, tomorrow.Jeffrey Levinedirector of advanced planning at Buckingham Strategic Wealth"This is really powerful, but what's really going to be key here is the definition of a qualified individual," said Gorman. To be able to take a coronavirus-related distribution, you or your family must have been hit physically or financially by the Covid-19 crisis, including having a positive test, losing a job or seeing reduced income due to the pandemic.

The CARES Act also made it easier for folks to take larger loans from retirement plans. It doubled the maximum amount people can take out as a loan to $100,000 and made it so people can take out their entire vested balance — the total amount in the account. It also extended repayment terms, meaning that people can take up to six years to pay the loan back.

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