It just got easier to borrow, withdraw from your retirement account

WASHINGTON » With unemployment still high, no agreement on a second round of stimulus payments, and the extra $600-a-week jobless benefit ending this month, the IRS has made it easier for people to pull money from their retirement plans without a costly penalty.

The Cares Act includes several provisions that cover retirement accounts. The act temporarily increases how much Americans

can borrow against their retirement plans, and it waives the customary penalty for early withdrawal of retirement funds. The relaxed rules for retirement plans initially apply to individuals directly impacted by COVID-19 — those who have tested positive for the coronavirus or who have a spouse or dependent who has become ill.

New guidance from the IRS widens the category of who can tap their retirement plan. Essentially, any plan participant who has been financially impacted by the pandemic or has someone living with them who has been financially affected can now take advantage of tax-friendly provisions of the Cares Act. So, for instance, a plan participant can withdraw money or take out a loan even if that person is still employed but a spouse is out of work because of COVID-19.

If you’re younger than 59½, you’re ordinarily subject to a 10% early withdrawal penalty, in addition to income tax, if you remove money from an IRA, 401(k) or 403(b) retirement account. The penalty is there to discourage people from tapping their retirement accounts before they retire.

However, under the Cares Act, if you have experienced financial hardship related to the pandemic, the 10% penalty is waived for distributions up to $100,000. The waiver only covers withdrawals made in 2020. Hardship withdrawals are not subject to the usual federal requirement that 20% of withdrawn retirement funds be withheld to cover taxes. Instead, individuals have up to three years to pay those taxes.

If an employer allows an employee to borrow from their retirement plan, the Cares Act has increased the limit of that loan to $100,000 from $50,000. And payments on both new and existing loans can be deferred for a year. Interest will continue to accrue, but the term of the loan can be extended to account for the payment pause. Another provision allows you to borrow up to 100% of your vested amount, which is the portion of your retirement fund that belongs to you, rather than your employer. The Cares Act has waived the rule that limits retirement plan participants to borrow no more than 50% of their fully vested balance or $50,000, whichever sum is less.

The Cares Act lays out who is eligible for these pandemic-related benefits. Individuals are covered if they contract the virus, and also if they experience adverse financial consequences as a result of being quarantined, furloughed or laid off, or have their work hours reduced.

The law gives the Treasury Department authority to determine other factors that might allow someone to take advantage of the new rules. In Notice 2020-50, the IRS expanded the benefit categories to include “any member of the individual’s household” who has lost a job or income or had an employment offer rescinded. It even applies to someone who has had a delay in the start date for a job. This might include a spouse, live-in partner, or an adult child who has moved back home. For purposes of applying these expanded rules, “a member of the individual’s household is someone who shares the individual’s principal residence,” the guidance says.

Allowing more Americans to access funds from their retirement plans is a good thing, said Robert Seltzer, a Californiabased financial planner and certified public accountant who has a lot of clients in the entertainment business who are not working. “I think it’s really hard to find someone who hasn’t been impacted,” he said.

Here are other situations that are covered under the Cares Act:

• You’re unable to work for lack of child care.

• You’ve had to close or reduce the hours of a business.

• Your self-employment income has been reduced. It’s important to note that employers are not required to change the provisions of their retirement plans to allow for the benefits provided by the Cares Act. The IRS also clarified that administrators of retirement plans can establish procedures to identify which withdrawals are considered coronavirus-related. But here again, the IRS paved the way for more people to access their retirement money as they deem necessary. Even if an employer plan doesn’t consider a distribution to be pandemic-related, individuals can “self-certify” on their federal tax returns that a distribution was qualified, the IRS said. “The guidance does seem to be really broad,” said Mary Kay Foss, a California-based CPA. “The whole reason behind the Cares Act is to help people as much as possible and get the economy going again.” In an economic crisis, you often have to ignore typical financial advice. Although the relaxed rules make it easier to tap your money under the Cares Act, financial planners and CPAs still caution that raiding your retirement money should be a last resort.

Readers can write to Michelle Singletary c/o The Washington Post, 1301 K St., N.W., Washington, D.C. 20071. Her email address is michelle.singletary@ washpost.com. Follow her on Twitter (@ SingletaryM) or Facebook (www.facebook.com/ MichelleSingletary). Comments and questions are welcome, but due to the volume of mail, personal responses may not be possible. Please also note comments or questions may be used in a future column, with the writer’s name, unless a specific request to do otherwise is indicated.