What is the Cares Act?

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was created to assist Americans cope with financial hard times due to the COVID-19 outbreak.

Under the Cares Act, if you are under retirement age, you are able to withdraw up to $100,000 from your retirement plan (401k, IRA, etc..) without penalty. But with all things taxes, you have to ask yourself what is the criteria and is this right for me? As always, careful tax planning is a necessity.

Are Your Eligible and Is This Right for You?

This is the criteria the government has put in place for withdrawing funds from your 401k without penalty under the Cares Act.

    #1 Either you, your spouse or someone you lived with got COVID-19, or you got laid off or you stopped working during the COVID-19 epidemic. There are so many things to consider here when it comes to how COVID-19 might have impacted you and your family. Be sure to speak to a tax professional, they will know if you have the right exemption in place before you withdraw money from your retirement plan.

    #2 The second consideration is how are you going to handle paying the tax on your withdrawal. Are you able to pay the taxes this year or are you able to pay them back over the next 3 years, which is now allowed under the Cares Act?

If you pay back your 401k withdrawal back within 3 years, you are able to do so without paying any tax up to $100,000. To take advantage of this, you will need to file amended returns so that you can recoup the taxes that you paid for 2020.

So, it really comes down to what are your goals and what do your finances look like currently. Can you afford to pay the tax this year in full or are would you like to spread the tax over 3 years. Of course, we recommend paying all the money back while enjoying your interest free loan.

If you have any questions concerning handling your 401K under the Cares Act, be sure to call us at 407-382-6658.