Not everyone is allowed to remove money from a retirement plan penalty-free.

Millions of Americans have been hurt financially in the course of the COVID-19 pandemic and the recession it’s spurred. It’s for this reason that the CARES Act was passed in late March. Its provisions included a direct $1,200 stimulus check, boosted unemployment benefits, and the option to take a penalty-free retirement plan withdrawal if a need for money arose. But be careful if you’re thinking of taking out a chunk of your retirement savings, because if you don’t follow the rules, it could cost you.

Are you eligible to take a CARES Act withdrawal?

Normally, IRA or 401(k) withdrawals taken prior to age 59 1/2 are subject to a 10% early withdrawal penalty. The CARES Act waives that penalty for withdrawals of up to $100,000, but not for everyone. Rather, to qualify, you must have been specifically impacted by the COVID-19 pandemic.

Notebook that says retirement savings plan with eyeglasses, pen, and calculator on it

IMAGE SOURCE: GETTY IMAGES.

You’re eligible to take a penalty-free withdrawal if:

  • You, a spouse, or a dependent has been diagnosed with COVID-19.
  • You’ve lost your job or had your income cut due to the pandemic, or due to being quarantined.
  • Your spouse became unemployed or lost income due to the pandemic, or due to being quarantined.
  • You’re unable to work due to a lack of child care.
  • You own a business and had to close or reduce its hours because of the pandemic.

Clearly, the rules surrounding CARES Act withdrawals are somewhat flexible. Case in point: If your spouse became unemployed but you’re still working and collecting your full salary, you can still tap your IRA or 401(k) early to compensate for your spouse’s missing income. But if you don’t fall into one of the above categories, and you take an early withdrawal from your retirement plan, you’ll face the 10% penalty that would normally apply.

Furthermore, even if you are eligible to take a CARES Act withdrawal, it doesn’t mean your employer will allow you to. The CARES Act does not require companies to let employees take early withdrawals from workplace plans, though most employers are making this option available.

Should you withdraw from your retirement savings?

If you need money and are eligible for a CARES Act retirement plan withdrawal, you may be eager to take one. But remember: Even if you manage to avoid a 10% penalty on the sum you remove, you’ll still be leaving yourself with less retirement income down the line. And that’s a risky thing to do.

Imagine you take a $15,000 withdrawal from a retirement plan whose investments normally deliver an average yearly 7% return on investment. If you’re 20 years away from retirement, that single withdrawal will actually cost you $58,000 in lost income when you factor investment growth into the equation. As such, make sure you’ve exhausted other options, like borrowing against your home, before taking money out of your retirement plan. And if you are going to take a CARES Act withdrawal, aim to keep it to a minimum. The less money you remove from your IRA or 401(k), the less it will hurt you down the line.

 

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Source article:  https://www.fool.com/retirement/2020/08/15/thinking-of-taking-a-cares-act-retirement-plan-wit/