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The CARES Act Lets You Tap Your Retirement Savings -- but Some Employers Won't Allow It

By Katie Brockman – May 3, 2020 at 8:02AM

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You might not be able to take advantage of these new provisions after all.

The coronavirus pandemic has caused serious economic hardship for millions of families across the country. More than 20 million Americans have filed for unemployment benefits over the last several weeks, and for some people, it might be a struggle just to pay the bills.

The recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act aims to provide financial relief to those affected by COVID-19, and one of the new provisions is loosening the restrictions around retirement account distributions.

However, while tapping your retirement fund might make it easier to get through these uncertain times, not all employers are on board. As you'll see in more detail below, some employers expect not to allow their employees to use these provisions at all.

Older man looking at a laptop, confused.

Image source: Getty Images.

New rules regarding retirement accounts

The CARES Act makes it easier to dip into your retirement savings, and it also allows you to borrow or withdraw more than usual.

Typically, when you withdraw money from your 401(k) or traditional IRA before age 59 1/2, you're subject to income taxes and a 10% penalty on the amount you withdraw. Under the CARES Act, however, the 10% penalty is waived, and you have three years to pay income taxes on your distributions.

In addition, if you choose to borrow money from your 401(k), you could typically only borrow 50% of your vested account balance up to $50,000. But under the new regulations, you can borrow 100% of your account balance up to $100,000. You also have an extra year to repay your loan under the CARES Act.

However, although the new rules might be helpful if you're strapped for cash, it's up to your employer to decide whether to adopt these practices -- and not all employers are on board just yet. Nearly 10% of organizations say they aren't adopting any of the new CARES Act provisions, according to a recent report from the Plan Sponsor Council of America, and 44% say they are still deciding whether they want to implement the new provisions.

Before you tap your 401(k), make sure your employer has adopted the new CARES Act provisions. Otherwise, you might not be eligible for as many of these new benefits as you think.

Should you dip into your retirement savings right now?

Regardless of whether your employer has implemented the new retirement account distribution provisions, ask yourself whether it's really a good idea to dip into your savings right now.

In general, it's best to leave your retirement savings alone as much as possible. If you borrow or withdraw money now, you'll need to work harder later to reach your retirement goals. To take full advantage of compound interest, you'll need to let your money sit untouched in your retirement fund for decades. Every time you withdraw or borrow some of that cash, you're making it more difficult for your savings to compound.

If money is tight, you might instead try to comb through your budget and cut any costs that aren't essential, or reach out to your creditors to see if you can defer some of your debt repayments to save money. Federal student loan payments are suspended until Sept. 30 under the CARES Act, so that might also free up some extra cash.

That said, sometimes you have no choice but to tap your savings. If you've lost your source of income, don't have an emergency fund to fall back on, and have run out of other options, you might need to use some of your retirement savings to pay the bills. In that case, only take out the bare minimum you need to get by. Even though it's less expensive to dip into your retirement savings right now, it's best to leave as much money as possible in your account so it can continue growing.

Times are tough for many families, and these new regulations under the CARES Act are intended to ease the financial burden. Just make sure your employer has implemented these provisions, and consider whether tapping your retirement fund really is the best move before you do so.

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