This is the second update in our series on the financial and economic fallout from the coronavirus pandemic. We started this series to keep our clients and radio listeners informed on the latest financial strategies to counter the economic impact of this crisis.

The $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act seeks to financially support Americans in a number of ways. What’s gotten the most attention is sending checks for $1,200 per adult and $500 per child to the majority of the American public to help shore up near-term finances and to provide an emergency cushion for those who’ve lost their income as a result of the pandemic.

If you’re struggling, $1,200 is better than nothing, but it really doesn’t help much in the long run. So, lawmakers added other provisions that allow people to access financial reserves they wouldn’t touch normally.

Below, you can find the provision of the CARES Act that allows Americans to access their retirement funds early, without a penalty.

One of the CARES Act provisions that’s not talked about much allows people to withdraw up to $100,000 from their IRA and 401(k) retirement accounts as hardship distributions. These withdrawals are exempt from the usual 10% penalty that applies to money taken out of tax-deferred retirement accounts before you turn 59.5 years old.

Ordinarily, the rules for withdrawing money from tax-deferred accounts are designed to discourage people from taking out their money early. A 10% penalty normally applies and you almost always have to include the withdrawn amount in your taxable income for the year in which you took the withdrawal. You could end up paying anywhere from $0.20 to $0.47 in taxes and penalties for every dollar you withdraw.

The CARES Act includes a provision that makes tapping retirement savings less painful. Anyone who takes a distribution can contribute the money that they took out back into a qualified retirement account. If they do this, it will be treated as if the withdrawal met the rules that allow you to roll over retirement money from one tax-deferred account to another.

So, if you get the money back into a tax-deferred retirement account within three years, there are no tax consequences. You won’t pay the penalty and the distribution you received won’t be counted as taxable income. This unique provision of the CARES Act makes early retirement account withdrawals a little more palatable.

At The Hidden Wealth Solution, we help Baby Boomers and retirees thrive in retirement. We continue to analyze CARES to determine how its provisions can best be used to help our clients successfully navigate through this difficult time. We are here to help answer our clients’ questions.

Charles Oliver
Wealth Strategist | Best-Selling Author
We Help Baby Boomers and Retirees Thrive in Retirement