In the monstrosity labeled the CARES Act, there is an ounce of good news for some people.  If you need to withdraw money from your 401k retirement account, you may be able to do so this year without paying an early-withdrawal penalty.

If you still work for your employer that sponsors your 401k plan, then you likely have not been able to take out a withdrawal in the past.  There are hardship withdrawals in some cases, but you have to provide extensive documentation and meet very specific requirements.

There are typically options for taking out a loan, and I don’t think people should discount this as a viable option.  But in the case of a loan, it will hurt your future cash flow, as you have to pay back the loan.  Sure, you are paying it back into your own retirement account, but it does become an expense at that point.

Many Americans have little in the way of savings.  If you look at middle class America, a good portion have the bulk of their net worth in two things: equity in their home and money in their retirement account.  In other words, a large portion of the population has a majority of their net worth tied up.

You can refinance your mortgage and take money out, but that is not always easy.  Plus, it means that if you keep doing that every time you need some liquid funds, you may never go without a mortgage.

For a 401k retirement account, you don’t have much for choices.  As mentioned above, a few select people can take out a hardship withdrawal, and some can take out a loan.  In most cases, the only way to actually withdraw “your” money is to quit your job, and that doesn’t seem like a good solution.  Even in that case, you will owe a 10% penalty if you are younger than the government-designated retirement age. Plus, you will owe income taxes on top of that for a traditional 401k.

Until Now…

There is a provision in the CARES Act that allows you to withdraw money from your 401k account up to $100,000.  You can choose to pay it back (like a loan) or you can keep it as a withdrawal and just pay income taxes.  You can even spread those taxes over three years.  But you don’t owe an early-withdrawal penalty.

This is good for calendar year 2020.  If you have a 401k account, check to see if your employer has allowed for such a withdrawal.

The law states that it is for people who have contracted COVID-19 or have had some kind of adverse financial consequences due to the impacts of COVID-19, including being quarantined (read specifications here).  In other words, it is a quite broad definition, and most people have been impacted in some way, if not by the virus, then by the lockdowns in response to the virus.

There are no documentation requirements as far as I can tell, although you should check with your employer or your plan to verify.  It is not like a normal hardship withdrawal where you have to provide documentation and specifically identify how the funds will be used.  With this provision of the CARES Act, you do not have to demonstrate how the funds will be used.

I am certainly not suggesting that everyone with a 401k plan should go ahead and take a withdrawal. It is there for your retirement. You will have to pay income taxes in most cases, assuming it is not a ROTH 401k and assuming you have some kind of income tax liability.

However, it is important to know that this option is there for you.  Most everyone I know has been impacted by the events of 2020. Some of these are financial impacts.

This is a one-time opportunity for people living on the edge to possibly get off the edge and get a little cushion in life.

If this is an option you are considering, you should be self-disciplined.  It shouldn’t be done so you can buy a new car that you don’t need.  It shouldn’t be done so that you can take a lavish vacation.  If it is an option you are considering, it should be done to get your financial house in order.  It is an opportunity to pay off debt and/ or build up an emergency fund.

I don’t think a lot of people are self-disciplined, so I don’t think they should touch their retirement account.  But that isn’t everyone.  There are people who may have hundreds of thousands of dollars in a retirement account from contributing over many years, yet they don’t have much for liquid funds.  Even withdrawing 5 to 10 percent out of the retirement account could alleviate a lot of stress on some people.  Again, this is with the caveat that they handle the money properly.

Is this an option you are considering?