COVID-19 temporarily changes the rules around tapping into your retirement savings

In an effort to provide emergency assistance and health care response for individuals, families, and businesses affected by the pandemic, on March 27, 2020, President Trump signed the Coronavirus Aid, Relief, Economic and Security (CARES) Act. Among the provisions of the CARES Act (Act) are certain considerations for retirement plans.

Whether you are already retired, nearing retirement, or still have many more years to save, you are likely concerned about not only your personal health, but also your financial health, particularly your retirement savings.

CARES Act provisions for retirement plans

The Act created some temporary withdrawal changes for certain retirement plans, designed to help eligible individuals access funds without incurring excessive penalties and taxes.

Typically, when you take distributions early from a qualified retirement plan or IRA before age 59 ½, not only do you pay ordinary taxes but also a 10% penalty may apply.  Through December 31, 2020, thanks to the CARES Act, you can withdraw up to $100,000 from your employer-sponsored or personal retirement account penalty free—but not tax free—if the withdrawals are considered “coronavirus-related distributions.” This means that if you are diagnosed with the virus SARS-CoV-2 or with COVID-19, or have a spouse or dependents diagnosed with such viruses or diseases, or experience adverse financial consequences as a result of being quarantined, furloughed, laid off, have reduced work hours, or are unable to work due to lack of child care or other related reasons, you may be eligible for an early distribution.

An additional feature of this new withdrawal provision is that taxes on the distributed income can be spread out over three years, which could be helpful for your tax planning as well.

The CARES Act also allows individuals aged 70½ and older to waive their required minimum distributions for 2020, enabling the funds to grow for another year, and permits loans of up to $100,000 from a qualified retirement plan; the current maximum loan amount prior to the Act was $50,000.

Should I take advantage of these temporary withdrawal provisions?

If you find yourself in financial distress and need an immediate solution, you may be tempted to make withdrawals from your 401(K) or IRA based on these new provisions. However, it’s important to take a good look at other options. Do you have other forms of savings? Perhaps a “rainy day” or vacation fund? These alternate sources, along with other government relief programs, could be enough to get you through this difficult period.

What if a withdrawal is my only option?

If your income has been disrupted and your savings depleted, and you feel taking distributions from your IRA or 401(k) is the only option, here are a few things to keep in mind:

  • Withdraw only the amount you need – don’t be tempted to withdraw the full $100,000 if you don’t need it, as you will be taxed on whatever amount you withdraw
  • Have a plan for how you will use the money, being thoughtful of paying essential expenses first, such as housing, utilities, auto, and grocery bills
  • Pay down debt with a higher cost/interest rate first (such as 18% credit card balance versus a 3% mortgage)

While the distribution income can be claimed completely in 2020, dividing it across three years may yield a better tax position and it may prevent you from being pushed to a higher tax bracket. That said, it may be beneficial to claim it all in 2020 if your expected income will be lower this year than the next two years. Be sure to speak with your tax advisor.

Are there alternatives to a withdrawal?

The CARES Act does make provisions for taking a loan from your retirement plan as another option. While both a loan and a withdrawal under the Act allow you to take up to $100,000, it’s important to weigh the differences, as outlined in Figure 1.

Figure 1: Comparison of 401(k) loan vs. withdrawal under the CARES Act

401(k) loan

401(k) withdrawal

  • Your money stays invested in your 401(k) and you essentially pay yourself back, keeping the tax deferral and potential earnings
  • You are required to pay the loan back within a specific time period (typically five years)
  • The loan is not taxed initially and there is no penalty
  • If the loan is not paid back within the five-year period, you will be taxed on the outstanding balance as if it were a standard withdrawal and you will be required to pay a 10% early withdrawal penalty
  • You can delay payments due in 2020 for one year from the time you take the loan
  • Should you leave your job, you must pay the entire loan back by mid-October of the following year or you will be subject to taxes and penalties
  • There is no requirement for repaying the funds
  • There is no withdrawal penalty
  • Money is initially taxed as income and you can claim a refund if you pay the funds back within three years
  • Taxes on the distributed income can be spread out over three years

Staying the course

You have undoubtedly heard many financial professionals urging investors to “stay the course.” But what does that mean? In short, it means have a plan in place and stick to if. Historically, bear markets have been followed by periods of strong growth. And there is no indication that the market will not bounce back again.

Whatever you feel is best for your personal situation, remember, you’re not in this alone. Before making any withdrawal or loan decisions, speak with an M&T banker or M&T Securities financial advisor. Together, we can help you understand your options, regardless of where your account is held, and explore all of the potential avenues to help you navigate through this challenging time.


This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. Please consult with the professionals of your choice to discuss your situation.


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