How Clients Can Raise Cash During the Pandemic

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If your clients are in need of additional funds during this pandemic, Congress has made one source more available if you are fortunate enough to have an account balance in your retirement plan and your plan has adopted the new provisions allowed by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

When you are evaluating whether your 401(k) plan is the right place to withdraw funds or borrow from, you will want to take into account the other set of major changes to retirement plan distributions that Congress enacted just three months prior to the CARES Act.

Those 401(k) plans are not the only type of defined-contribution plan that have been affected by the rule changes – §403(b) plans and §457(b) plans, as well as other plans defined by IRC §401 such as profit-sharing plans, are all similarly affected. I will refer to all of these as DC plans.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act came into being on December 20, 2019, and the CARES Act was enacted on March 27, 2020 as a result of the pandemic. Both of these acts contain a number of provisions that dramatically affect the rules relating to loans or distributions from DC plans as well as distributions from IRAs.

The following questions and answers will bring you up to date on where things stand as a result of those two acts. Pay particular attention to whether the law applies to IRAs, DC plans or both. In general, the laws have been relaxed to a much greater extent with DC plans than with IRAs. Most significantly, no loans are allowed from IRAs.

What are the rules on taking early distributions from IRAs or DC plans?

The CARES Act allows IRA owners or participants of DC plans to withdraw up to $100,000 in “hardship distributions” from their account balances in 2020 without penalty regardless of the owner’s or participant’s age. A “hardship distribution” is a withdrawal made because of an immediate and heavy financial need and limited to the amount necessary to satisfy that financial need. In addition, the distributions may be repaid to the IRA or DC plan within three years of the distribution unless the owner/participant elects otherwise.