To Withdraw or Not to Withdraw?

Taking advantage of the CARES Act Retirement Benefits

As expected, the new $900 billion coronavirus relief package continues to include the elimination of the 10% withdrawal penalty for qualified retirement account holders who have a valid Covid-19-related financial hardship. It allows them to withdraw up to $100,000 from their tax-deferred retirement accounts, or taxable earnings in a Roth account, in 2021.

Under normal circumstances, withdrawing funds from most tax-deferred retirement accounts–like a 401(k) or a traditional IRA–before age 59 ½ triggers a 10% penalty from the IRS in addition to the income tax you’d normally owe on the withdrawal. Earnings, but not contributions, withdrawn from a Roth account are hit with the penalty as well.

Valid Covid-19-related hardships include a positive coronavirus diagnosis for the account owner, their spouse or a dependent; a lay-off, furlough, reduction in hours, inability to work or lack of childcare because of Covid-19; a delayed or rescinded job offer because of Covid-19; or Covid-related closing or reduced hours for a business owned by the account holder or their spouse.


The new relief package and extension of the CARES Act also continues to waive the 20% mandatory tax withholding requirement for early withdrawals from workplace tax-advantaged retirement accounts. This withholding is how the IRS normally ensures that plan participants pay the necessary taxes on their early withdrawals.

But just because you can avoid both the early-withdrawal penalty and the mandatory withholding does not make your early distribution free of taxes, however. The lowest tax bracket under current tax law is 10%, so you need to prepare to pay at least 10% of what you take out. So if you need to take a $50,000 withdrawal, expect to owe at least $5,000 in taxes.

Paying your taxes in three even installments

The CARES Act allows for some flexibility in paying those taxes. You have the option of paying your taxes in three even installments for the 2020, 2021, and 2022 tax years. The CARES Act also allows participants to redeposit the money within three years of the distribution, which is much longer than the usual 60 day allowance for redepositing early withdrawals. If you do choose to return the money, you will owe no taxes, although you may have to file an amended tax return to get back any taxes you paid on the early distribution prior to redepositing it.

While expanded access to retirement funds may provide an important financial lifeline, I recommend to try exhausting other options first. Even with all of these CARES Act breaks, taking early withdrawals could end up costing you thousands of dollars and putting you in an even worse financial position than you’re already in.

That’s because money taken out of your retirement investments can’t grow. You lose the momentum of your investment which makes it harder for your account to recover. And though you may need money now, you’re taking it from your 75 or 80-year old self.

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