Retirement Account Withdrawals Penalty Free under CARES Act 2020

For couples facing divorce one of the most pressing concerns is how to run two households on the same income that used to support one household. 

While most divorcing couples have retirement assets the only option to access those funds under the age of 59.5 is to either take a loan from a 401k, which is limited to no more than 50% of the total balance, or take a premature withdrawal. In the case of a withdrawal from an IRA it includes a 10% penalty as well as an automatic 20% withholding for tax purposes. A loan from a 401k is also problematic as it must be paid back incrementally, increasing your monthly expenditures. 

The CARES Act removed the 10% penalty for early withdrawal from a 401k or IRA for families impacted by COVID-19 for withdrawals up to $100,000 per person. The Act also removed the automatic tax withholding requirements. While the withdrawals will still be taxed as ordinary income it can now be spread out over three years, and if the funds are paid back within three years you can get a refund on the taxes you are paid. 

The CARES Act also permits individuals to withdraw 100% of their vested 401k balance and defer loan repayments for up to one year. 

To qualify to make one of these withdrawals, however, you need to show that Covid-19 has impacted your life. A person diagnosed with Covid-19 or with a spouse or dependent who was diagnosed is sufficient grounds to qualify.  You may also qualify if you experienced any adverse financial impact such as being furloughed, laid off, having hours reduced, or were unable to work because of childcare needs. You should verify with a financial planner before taking any withdrawals, but the CARES Act may provide new options to cash strapped families suffering through the pandemic and experiencing a divorce.