The CARES Act and Your Retirement Accounts

May 21, 2020

Retirement fund

The 2020 CARES Act includes a number of provisions regarding how you can access the funds in your retirement accounts. In this article, we will be discussing what the CARES Act is, how it affects your retirement accounts, and whether or not you should take advantage of those changes.

What is the CARES Act?

The CARES Act, or the Coronavirus Aid, Relief, and Economic Security Act, was signed into law on March 27, 2020. As the name suggests, it is an economic relief package put in place in response to the COVID-19 pandemic. It is meant to relieve the financial stresses of the pandemic on American workers and families, small businesses, and state and local governments. The portion of the Act that we are interested in specifically is where it outlines some temporary changes to how 401(k)s and IRAs can be used by workers to support themselves and their families.

How Does the CARES Act Affect Early Withdrawals?

The CARES Act changed some of the rules surrounding how you can take early withdrawals from retirement accounts, including your 401(k) and IRA. For account owners that are age 59 ½ or younger, the act allows for early distributions of up to $100,000 in 2020 without the normal 10% early withdrawal penalty. If the withdrawal is coming from a qualified retirement plan like your 401(k), the mandatory 20% withholding rule has also been suspended.

You will owe income tax on the withdrawal, but the act gives you the flexibility of spreading the taxes over three years (2020, 2021, and 2022). As an alternative, you can avoid the taxes by redepositing the money into a retirement account within three years (normally you only have 60 days to do this).

The CARES Act and 401(k) Loans

401(k) retirement fund

Rules on 401(k) loans have also been relaxed by the CARES Act. Under normal circumstances, the limit on the amount you could borrow from your 401(k) was either $50,000 or 50% of the vested account balance, whichever is lower, and you had 5 years to repay the loan after it was taken.

The new rules make it much easier to borrow and repay loans from your 401(k). The limit on the amount you can borrow has been raised to $100,000 or 100% of the vested account balance, whichever is lower. While the loan must be repaid in 5 years, you do not have to make repayments in 2020, giving you additional time to repay the loan.

There is one more change that affects existing loans rather than new ones. Any loans that would have to be repaid by the end of 2020 are extended by 1 year. This means if you have an outstanding loan that needs to be repaid by December 31, 2020, it is now extended to December 31, 2021.

Qualifying for Early Withdrawals and Enhanced 401(k) Loans

In order to qualify for the CARES Act changes to early withdrawals and enhanced 401(k) loans, you must be suffering from financial hardships related to one or more of the following criteria:

  • You or someone in your immediate family has the virus,
  • You have been quarantined, furloughed, laid off, or have had your work hours reduced due to the virus,
  • You cannot work due to a lack of childcare caused by the virus,
  • Your business has been closed or has had its operating hours reduced in response to the virus, or
  • You have been adversely impacted financially by other factors as determined by the Secretary of the Treasury.

RMDs are Suspended for 2020

Required minimum distributions (RMDs) from qualified retirement accounts like 401(k)s and IRAs have been suspended for 2020. This means, if you do not need your RMD to pay living expenses, you do not have to take it. If you’ve already taken an RMD this year, you may be able to put it back. If you took an RMD distribution between February 1, 2020 and May 15, 2020, you will have until July 15, 2020 to complete a 60-day rollover back into your retirement account. But if your RMD was taken from an inherited retirement account, you are not able to put the money back into the account. 

You do not have to meet the CARES Act eligibility restrictions to suspend your RMD withdrawals for 2020 — these requirements only apply to enhanced early withdrawals and enhanced 401(k) loan rules.

Should You Withdraw Money from Your 401(k) or IRA?

Low cash reserves

If you have been financially impacted by COVID-19, you may be wondering if you should take money from your 401(k) or IRA. Tapping into your retirement funds early can have long-lasting effects, so your 401(k) or IRA should be a last resort during a financial downturn. You will be selling investments when they have lost value and it may take years for you to catch up. We recommend that you exhaust all available cash reserves before dipping into your retirement accounts.

However, there may be specific circumstances in which taking advantage of the changes to 401(k)s and IRAs could make sense. If you have lost your source of income, have limited savings, and have no other cash reserves, taking an early withdrawal or 401(k) loan may be your only choice to provide for you and your family. But even in a situation like this, it is best to consider all available options, and their impact on your retirement plan, before taking a withdrawal. For this reason, we suggest speaking to a wealth management advisor who specializes in retirement planning.


The CARES Act, which provides economic relief options for those affected by the coronavirus pandemic, was signed into law earlier this year. One of the ways in which it provides relief to individuals is by making it easier to take early withdrawals or loans from your retirement accounts. However, doing this should be a last resort in most situations because of the potential impact it could have on your retirement plan.

Trinity Wealth Management

If you are concerned about your financial future, please contact the Trinity Wealth Management team today. Our fiduciary financial advisors can help you make the best decision when it comes to how you use your money. If you believe that taking advantage of the CARES Act is your only option, we will help you determine if there are any alternatives available before you make that decision.

The commentary on this website reflects the personal opinions, viewpoints and analyses of the Trinity Wealth Management, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Trinity Wealth Management, LLC or performance returns of any Trinity Wealth Management, LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Trinity Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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