How Your 401k Can Get You Through COVID

Given today’s environment where we seesaw between opening up business and tightening more due to COVID, it’s important to think about and understand how we’re going to financially cope. Many Americans have been laid off due to the Pandemic and find it more than challenging to find work as many states have not lifted capacity restrictions on indoor dining, sporting events, outdoor venues and general gatherings.

On the other hand, some like myself are trying to deal with paying the bills while being laid off, but also thinking of being more in control and perhaps even looking for financial independence. So, I started doing research on how the Pandemic has change the rules around 401k/IRA withdrawals and here’s the summary of what I’ve found:

CARES ACT

Originally, Section 2202 of the CARES Act allows individuals to take
up to $100,000 from their 401ks and IRAs with no tax and no penalty. 

• Qualifications:
  If you or a family member had COVID-19 based on a CDC-approved test
• Or if you had financial consequences because of COVID-19 related conditions including:
  •  If you couldn’t work due to a lack of childcare
  • If your place of work had to shut down or cut hours substantially
  • Or if you were furloughed or laid off

CAA

The Consolidated Appropriations Act of Dec 27, 2020 expanded some of the benefits of the CARES
ACT into the new year for 180 days. Additional rules include:

• Those affected by a Natural Disaster on or after 1/1/2020 (and thru 60 days) could now qualify
• Expanded limits for K-Loan withdrawals allowed under CARES ACT
• Extended FSA Grace Period 12 months
• Extended Employers option to make payments up to $5,250 towards Student Loans Tax Free.
• Allows Americans to withdrawal up to $100,000 from their 401(k) penalty-free until June 2021

ARPA

The American Rescue Plan Act of 2021 was passed on March 11, 2021 and really expanded some of the rules installed by the CARES ACT and CAA.  It was designed to facilitate the United States’ recovery from the devastating economic and health effects of the COVID-19 pandemic.

Key Notes:

• Passed the House Feb. 27, 2021, and the Senate March 6, 2021—was signed into law by President Biden on March 11, 2021.
• The package weighs in at a cost of $1.9 trillion making it one of the largest economic rescue plans in U.S. history.
• It mixes efforts to mitigate the economic effects of the pandemic with strategies to fight the virus itself.

Part of what’s new is the focus on small businesses, education and really putting money towards administration of the Vaccines so that the administration could expand efforts on protecting Americans and expediting the process to reopening.

Now with regard to the topic of utilizing your 401K to either help pay bills during COVID or starting a business. We all know that the IRS really wants to dissuade people from taking the money before retirement
age, or at least 59 1/2, so it will only be taxed and penalized if not paid back within 3 years. 

It makes sense to evaluate using your 401k as an option for helping you get the bills paid or starting your business. But it also makes sense to fully understand the ramifications by taking to a CPA or Tax Accounting before the application process.