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By Elizabeth O'Brien
March 26, 2020
CSA-Printstock / Getty Images

The coronavirus relief bill that lawmakers just passed allows cash-strapped investors to withdraw money from their retirement accounts, penalty free. But this should be a last resort, financial advisors say.

If you’re facing economic hardship tied to the coronavirus, you can tap your traditional retirement account, withdrawing up to $100,000 without the typical 10% penalty that typically applies to withdrawals before the age of 59 ½ (outside of certain exemptions). This applies to traditional 401(k)s, 403(b)s, and individual retirement accounts (IRAs).

The bill also expands unemployment benefits, making more workers eligible for them and boosting checks by $600 per week through July. Most Americans will also get a one-time relief check of up to $1,200, plus $500 for every child (check amounts taper off at higher incomes).

While that’s not a lot of money to tide over workers who might have lost their jobs, keep in mind that most expenses can be deferred during this pandemic, says a Ric Edelman, founder of Edelman Financial Engines in Fairfax, Va. The stimulus bill temporarily suspended student loan payments, and credit card companies are working with borrowers to lower interest rates and make other allowances. The government on Saturday announced a 60-day foreclosure and eviction freeze for homes with Federal Housing Administration-insured mortgages. Homeowners whose properties aren’t covered can ask their lender directly for forbearance, and renters can ask their landlords for the same.

That leaves food and medicine among the few urgent needs that can’t be deferred at least temporarily, Edelman says. If you need help with these and other essentials, then your retirement funds could be a welcome lifeline.

The way the bill is phrased, there appear to be two different provisions, according to Michael Townsend, vice president of legislative and regulatory affairs at Schwab: one allows for a hardship withdrawal that may be repaid over three years; if it’s not repaid, you’d have to pay income taxes on the amount. (The IRS will likely have to clarify exactly when income tax would be owed during that three-year window, Townsend says.) The other allows for a loan that would be repaid over an extended repayment schedule, he adds.

Kelley Long, certified public accountant, consumer financial education advocate for the American Institute of CPAs, says that the bill’s 401(k) withdrawal provisions apply to everyone who is unemployed. However, if you’re still an active employee, you’ll have to get your company’s approval to use them. (The federal government sets the parameters for companies, which have leeway to adopt them or not, she notes.)

If you do withdraw money from your retirement account, try to repay yourself as soon as you get back on your feet. Repayments won’t count toward the annual contribution cap for retirement accounts. For those who have the means, now is actually a great time to increase your 401(k) contributions — the market is down, so you’ll be buying stocks at a discount. Another reason to leave your 401(k) alone, if at all possible? Those funds are protected in bankruptcy proceedings.

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