COVID-19 Pandemic: 401(k) Loans and the CARES Act

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Continuing with our dissection of the various sections of the CARES Act, we'll now turn to a source of funds to be used as a last resort - loans from one's 401(k) plan.

Before getting into the details, I will state that in addition to our tax and accounting practice, we are also fully licensed wealth management professionals. Nothing in this article is meant to be taken as investment advice and any discussion of investments is meant in a broad, general term within the context of taxation.

As we practice in both disciplines, we have a unique perspective on this - the long view.

As dire as the situation seems now, the long view teaches us to not make rash moves. This is critically true when it comes to our most important financial investments - retirement funds. I try to avoid words like 'always' and 'never', but when it comes to taking funds out of a 401(k), other than for normal RMDs, it's never a good idea.

With that said, if you feel that your situation necessitates this action, we at least want you to have the facts, such as we know them at time of publishing.

For people who feel a need to take an early distribution from your retirement plan, we first suggest that you consider a loan from that plan instead. Not all plans allow for loans, but some do and it can save you money if you at least make the inquiry.

Generally speaking, a person could take a loan against their 401(k) plan that was equal to the lesser of $50,000 or 50% of the balance. Loans had to be repaid within a certain time frame or the loan would be deemed as an early distribution, subject to both penalty and tax.

The CARES Act contains a provision that increases the amount eligible for a loan to the lesser of $100,000 or 100% of the balance.

What is not known, at the time of typing, is what happens if a person already has an outstanding loan against their retirement plan. In the absence of clear guidance, I would defer to the existing rules which limited the number of loans to one at a time. If this situation applies to you, you'd need to payoff the existing loan, wait a certain amount of time, and then initiate a new loan at the higher limit. The CARES Act gives a 180 day window from the date of enactment (3/27/20) for these higher limit loans to occur.

Thank you again for this opportunity to serve.

Stay safe and wash your hands.

Sincerely,

Jonathan Rivlin, CPA

President

The Rivlin Group PC

Disclaimer:

The purpose of this article is for informational/educational use only. No client relationship is intended by virtue of your use of this article. This article cannot be relied on for official advice regarding your specific situation, and is meant only to be general in nature. Because the regulatory environment is so dynamic at this time, it is possible that the content in this article will be superseded. This article was drafted on 12th April 2020.

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