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The CARES Act Lets You Borrow More From Your 401(k) -- but Your Employer May Not

By Christy Bieber – Aug 19, 2020 at 9:15AM

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Only a small number of employers are offering the option to take larger loans.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act aimed to provide financial relief by, among other things, making it easier for Americans to borrow money from their 401(k) tax-deferred retirement accounts. Under the CARES Act, the limit on 401(k) loans was doubled from the lesser of $50,000 or 50% of the vested account balance up to the lesser of $100,000 or 100% of an employee's vested account balance. 

However, while the legislation allowed employers to offer larger loans from retirement accounts, it didn't require them to do so, and many have opted out. According to recent research from Ascensus, just 8.5% of employers have adopted the expanded loan options, so many workers won't be able to tap into their retirement funds as much as they'd hoped for if they're facing financial troubles related to COVID-19. 

Piggy bank with colorful 401(k) letters next to it.

Image source: Getty Images.

What options are available to you if you can't borrow as much from your 401(k) as planned?

The good news is, even if your employer hasn't adopted the expanded borrowing limits under the CARES Act, you may still be able to take a 401(k) loan under the old rules. That means you could potentially borrow as much as $50,000 or 50% of your vested account balance. So a 401(k) loan may still be an option if your plan permits loans at all. 

You may also be able to take a penalty-free withdrawal for up to $100,000 under the CARES Act. While you're generally subject to a 10% early withdrawal penalty if you take money out of your 401(k) before age 59 1/2, this penalty is waived for coronavirus-related distributions this year. You'll still be taxed on the withdrawal as ordinary income but can pay the taxes over three years. And the CARES Act also gives you the option to pay back the amount you withdrew during the next three years with no impact on future contributions (and no tax consequences). 

Because of the relaxed rules for 401(k) withdrawals, this may actually be a better option than taking a loan, even if your employer allows a larger one, as defaulting on the loan would trigger the 10% early withdrawal penalty. So if you borrow and it turns out you can't repay your loan, you'd be much worse off than if you'd simply taken a withdrawal (even if you couldn't pay it back in the end). 

You can also look into other options besides raiding your retirement account, the best of which is to cut your budget and take advantage of unemployment or other benefits so you don't have to go into debt or jeopardize your future retirement security. But if you can't make the numbers work, home equity loans, 0% APR credit cards, or low-interest personal loans are also worth considering.

Why borrowing against your 401(k) can be a bad idea anyway

If you were planning to borrow a substantial amount of money from your retirement accounts and are stymied because your employer isn't making larger loans available, this may actually be a blessing in disguise.

First and foremost, not being able to borrow as much could make you less likely to take out a loan you can't pay back, which also could subject you to early withdrawal penalties. It also means you'll leave more of your money invested to grow for your future.

Rather than get discouraged if your employer hasn't raised the amount you can borrow, take the time to look into other options, such as reducing expenses or withdrawing funds with a plan to pay them back. Being restricted to a smaller loan may mean you'll make more sacrifices now since you can't access the full amount of funds you were hoping to, but take heart because you may end up better off in the end. 

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