CARES Act 401(k) Withdrawal Guide

Because of the financial difficulties the COVID-19 pandemic had caused, the US Congress introduced the CARES Act, which stands for Coronavirus Aid, Relief and Economic Security.

In general, this act allows families who are struggling with financial issues to take a 401(k) withdrawal.

What Is the CARES Act 401(k) Withdrawal?

A $2 trillion-bill was passed by U.S. lawmakers back in March 2020 called the CARES act which aims to help Americans who have been affected by the COVID-19 pandemic.

The act provides access to retirement funds from 401(k) plans.

The CARES Act 401(k) Withdrawal allows those with a 401(k) plan to withdraw their funds for financial hardship reasons relative to the COVID-19 pandemic without being penalized.

The bill was signed into law on March 27, 2020 by President Donald Trump.

How Does a CARES Act 401(k) Withdrawal Work?

Normally, withdrawals made from a tax-deferred retirement account by a participant who has not reached the age of 59 1/2 is subject to a 10% early withdrawal penalty. The said withdrawal will also be considered part of their taxable income for the year.

A few exceptions have been made to this general rule, such as, situations of foreclosure of property, post-disaster home repairs, and medical expenses. The amount to be withdrawn is limited according to the specific amount needed for each situation.

The CARES act has allowed greater flexibility compared to the typical situations that allow for 401(k) withdrawals, especially because the CARES act has lifted the 10% early withdrawal penalty. Withdrawal amounts have also been limited up to $100,000 per participant without tax penalty but will be included as part of the participant’s taxable income for the year.

To make it even more flexible and beneficial, participants are given the option to pay federal income taxes associated with the amount withdrawn over a three-year period. He/She may also avoid the tax consequences by repaying the distribution amount over the same length of time. The basis of the three-year period is the time when the distribution was made.

Who Is Eligible to Take a CARES Act 401(k) Withdrawal?

A qualified individual is someone who:

  • has been diagnosed with COVID-19 by a test taken and approved by the Centers for Disease Control and Prevention. A participant’s spouse or dependent who has been diagnosed by the same will also be counted as qualified, or
  • has gone through adverse financial consequences resulting from certain events relative to the COVID-19 pandemic. These may include situations such as being quarantined, laid off, furloughed, or work hours have been reduced due to the pandemic. 

Individuals whose businesses may have been closed or operating hours have been reduced may also qualify. Individuals whose jobs have been rescinded or job starts have been delayed because of the pandemic are also qualified.

You may read more of CARES act eligibility through the Notice 2020-50, Guidance for Coronavirus-Related Distributions and Loans from Retirement Plans Under the CARES Act

How to Process a CARES Act 401(k) Withdrawal?

Plan participants should reach out to their plan administrators to get help in processing a 401(k) withdrawal relative to the CARES act.

Typically, the participant will need to furnish a withdrawal form, along with sufficient documentation to give proof to the COVID-19 hardship situation he is in.

The request shall be scrutinized by the designated person responsible for the assessment of the participant’s hardship situation. If the participant qualifies per the eligibility requirements set by IRS, the request shall be processed.

An applicant should note that the processing will take weeks depending on the plan administrator.

Should a participant’s request be denied, he or she will be duly notified by the plan administrator.

Form 1099-R will then be issued by the plan administrator to the qualified participant at the end of the year to record the taxes to be taken from the distribution amount. A copy of this form will also be furnished by the plan administrator to the IRS.

Participants will use the Form 1099-R to accomplish their tax return via Form 1040. Forms 8915-E will likewise be completed by the taxpayer, along with his or her individual tax return.

How Will the 401(k) Distribution Affect My Retirement?

While the CARES act 401(k) withdrawal may be beneficial in a lot of ways to qualifying participants, it is equally important to consider many factors that could affect their retirement in the long run.

Here are a few things that might affect retirement should a 401(k) withdrawal be done:

Low Principal Savings Amount

Withdrawals taken from the principal savings amount will decrease the total principal savings amount. Without principal, retirement income will be lower. As such, participants must consider this factor when taking a withdrawal relative to the CARES act.

Time and Compounding Interest

Retirement savings are greatly affected by time and interest because the longer the period of time the principal savings amount is invested, the more money will be generated through interest.


401(k) withdrawal is taxed like regular income under certain conditions which could lessen the value of the withdrawal over time.

Having an Excess Amount in Cash

When individuals take out large sums from their accounts through CARES-related distributions, it can take time for them to accumulate enough savings once more to begin investing again. They might find themselves having an excess amount of cash that might not have any growth in some time.

Missing Potential Gains

Any withdrawals made from a 401(k) account will mean missing on potential gains the savings would have earned along the way.

Impact on Required Minimum Distribution (RMD)

At the end of the year, participants are required to take their RMD according to IRS rules for taxation purposes. A CARES act 401(k) withdrawal adds up to this amount and may affect subsequent years’ RMD requirements if not monitored properly.

Should I Go For 401(k) Loan or 401(k) Withdrawal?

Here are a few points to consider whether it is better for a participant to go for either a loan or withdrawal from a 401(k) account:

401(k) Loan

  • Loan needs to be repaid within a specified time frame.
  • Loan amount isn’t taxable initially and no penalty can be taken from it also. Taxes will only be charged if a participant is unable to pay back the balance within the specified time frame. A ten percent early withdrawal penalty may only be charged if the participant is under 59 1/2 years old.

401(k) Withdrawal

  • Participants aren’t required to repay the amount withdrawn but may opt to.
  • No early withdrawal penalty will be charged.
  • Amount withdrawn from the account will be part of taxable income at year end but the participant has the option to repay it within 3 years to avoid taxes.

Final Thoughts

The CARES act 401(k) withdrawal is a good provision for individuals who have been impacted by the coronavirus and are in hardship situations. Eligibility factors, however, must be carefully studied to avoid mistaken payments from being made.

CARES act 401(k) withdrawals are beneficial for people who have lost their income because of the coronavirus and are not in a position to make further contributions.

For many, however, there is still more work that needs to be done before they can continue with their retirement plans.

In this light, it is best to carefully assess why you want to take a withdrawal from your account. Carefully read all eligibility requirements and understand what tax implications come with taking out funds from your accounts under these provisions.

The Cares Act 401(k) Withdrawal is a provision of the CARES act, which was created in order to provide relief for people who have been impacted by COVID-19.
CARES stands for the Coronavirus Relief and Economic Support Act.
The Cares Act allows people who have lost their income due to COVID-19 to take out amounts from their 401k accounts to help them meet expenses. It is important for people considering this option to be aware of several provisions under this provision, including eligibility requirements, taxes, time limits, repayment conditions and penalties for early withdrawal.
You can get more information about the CARES act 401(k) withdrawal on the IRS website, where there are detailed guidelines posted. You may click on this link to be routed:
Taking out funds from a 401(k) account could have several repercussions for an individual, including affecting his/her future contribution limits, RMDs (required minimum distributions), tax consequences and loss of employer-matching contributions.

401(k) Plan | A Complete Beginner's Guide

401(k) Meaning

The 401(k) retirement savings account got its name from the Revenue Act of 1978, where an addition to the Internal Revenue Services (IRS) code was added in section 401(k). Consequently, 401(k) does not stand for anything except for the section of IRS tax code it was created in.

Traditional 401(k) vs Roth 401(k)

There are two types of 401(k) plans: Traditional and Roth 401(k)s. The traditional 401(k), named after the relevant section of the IRS code, has been around since 1978. With this plan, any contributions you make to the 401(k) account will reduce your income taxes for that year and will be taxed when they are withdrawn. Roth 401(k)s, named after former senator William Roth of Delaware, were introduced in 2006. Unlike a traditional 401(k), all contributions are made with after-tax dollars and the funds in the Roth 401(k) account accrue tax free. Typically, employees can take advantage of both plans at the same time, which is recommended among financial advisors to maximize retirement savings. Because of the way the contribution limits work, it is possible to invest different amounts into each account, even year-to-year, so long as the total contribution does not exceed the set limit.

Contributing to Your 401(k) Retirement Plan

Contributing to a 401(k) plan is traditionally done through one’s employer. Typically, the employer will automatically enroll you in a 401(k) that you may contribute to at your discretion. If you are self-employed, you may enroll in a 401(k) plan through an online broker, such as TD Ameritrade. If your employer offers both types of 401(k) accounts, then you will most likely be able to contribute to either or both at your discretion. To reiterate, with a traditional 401(k), making a contribution reduces your income taxes for that year, saving you money in the short term, but the funds will be taxed when they are withdrawn. With a Roth 401(k), your contributions can be made only after taxation, which costs more in the short term, but the funds will be tax free when you withdraw them. Because of this, deciding which plan will benefit you more involves figuring out in what tax bracket you will be when you retire. If you expect to be in a lower tax bracket upon retirement, then a traditional 401(k) may help you more in the long term. You will be able to take advantage of the immediate tax break while your taxes are higher, while minimizing the portion taken out of your withdrawal once you move to a lower tax bracket. On the other hand, a Roth 401(k) may be more advantageous if you expect the opposite to be true. In that case, you can opt to bite the bullet on heavy taxation today, but avoid a higher tax burden if your tax bracket moves up. Check out this article from Forbes to see the IRS tax rate tables for 2020, but remember that they are subject to change. A smart move may be to hedge your bets and divide your contributions between the two types of IRAs. If your employer allows you to add funds to both a traditional and Roth 401(k), then doing so reduces the potential risks of each. In this case, you will also have the ability to decide what proportion of your income goes into each account, meaning that as you near retirement and have a clearer idea of what position you will be in, you can put more into one or the other. When you do decide which avenue to take, make sure to thoroughly evaluate your decision. Moving funds from one account to another, such as from a traditional to a Roth 401(k), is time consuming and expensive, if even possible. Likewise, transferring a 401(k) from one employer to another in the event of a job change is also tricky. You want to make sure that when you put money into your plan, it will be able to sit undisturbed for a very long time.

Pension vs 401(k)

Pensions are similar to a 401(k), but are a liability to a company. If an employer offers an employee a pension, it means that they are promising to pay out a set amount of money to the employee at the time of their retirement. There is typically no option to grow this amount, but it also does not require any financial investment from the employee. Pensions, also referred to as defined-benefit plans, are becoming increasingly rare because it puts the financial burden of offering a retirement fund for employees entirely on the employer. 401(k)s, which are also called defined-contribution plans, take some of the financial pressure off of an employer, while also allowing employees to potentially earn a larger retirement package than they would have with a pension.

How Much Should I Contribute to My 401(k)?

Most financial experts say you should contribute around 10%-15% of your monthly gross income to a retirement savings account, including but not limited to a 401(k). There are limits on how much you can contribute to it that are outlined in detail below. There are two methods of contributing funds to your 401(k). The main way of adding new funds to your account is to contribute a portion of your own income directly. This is usually done through automatic payroll withholding (i.e. the amount that you wish to contribute, counting all adjustments for taxation, is simply withheld when receiving payment and automatically put into a 401(k)). The system mandates that the majority of direct financial contributions will come from your own pocket. It is essential that, when making contributions, you consider the trajectory of the specific investments you are making to increase the likelihood of a positive return. The second method comes from deposits that an employer matches. Usually employers will match a deposit based on a set formula, such as 50 cents per dollar contributed by the employee. However, employers are only able to contribute to a traditional 401(k), not a Roth 401(k) plan. This is especially important to keep in mind if you want to utilize both types of plans. A key variable to keep in mind is that there are set limits for how much you can add to a 401(k) in a single year. For employees under 50 years of age, this amount is $19,500, as of 2020. For employees over 50 years of age, the amount is $25,000. If you have a traditional 401(k), you can also elect to make non-deductible after-tax contributions. The absolute limit, counting this choice and all employer contributions, is $57,000 for employees under 50, and $63,000 for those over 50 as of 2019.

Plan in Advance

Allow us to help you prepare and plan for your retirement ahead. Contact a financial advisor in St Helena, CA or visit our financial advisor page for other details.

401(k) Plan FAQs

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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