The CARES Act includes provisions that make it easier for people to tap or borrow from their retirement money for coronavirus-related reasons. However, it’s up to employers to decide whether to implement the changes in their company’s 401(k) plans.

Here’s everything you need to know about these changes, and the pros and cons of allowing plan participants to take advantage of each.

Expanded retirement account distributions

Account holders under age 59½ can withdraw up to $100,000 from their 401(k) or IRA during 2020 without paying a 10% early withdrawal penalty.

The only catch is they need to meet one of the following coronavirus-related requirements:

• The account owner was diagnosed with COVID-19 by a CDC-approved test,
• The account owner’s spouse or dependent has been diagnosed with COVID-19 by a CDC-approved test, or
• The account owner experiences adverse financial consequences as a result of:
  • Being quarantined, furloughed, laid off, or having work hours reduced because of the virus
  • Being unable to work due to lack of childcare because of the virus
  • Closing or reducing business hours due to the virus.

The CARES Act also waived the 20% mandatory federal income tax withholding from coronavirus-related retirement distributions (CRD).

Before taking a 401(k) withdrawal, employees need to be aware that the distribution is taxable. Those who take a CRD in 2020 must report the withdrawal when they file their federal income tax return in 2021.

However, for CRDs, participants have three years to either pay the taxes due on the distribution or replace the money and not owe taxes on it.

Pros and cons of coronavirus-related distributions (CRDs)