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What the CARES Act Means for Your Retirement Plan

New IRS guidance reduces penalties and borrowing limitations

Alts for All Staff
June 27, 2020

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Amidst heightened unemployment and uncertainty surrounding a second round of stimulus, the IRS has instituted a series of temporary provisions concerning retirement accounts as an extension of the Cares Act, loosening penalties and limitations associated with 401ks and other retirement plans.

The provisions in section 2202 of the Cares Act, which waive early withdrawal penalties and expand the amount that can be borrowed against one’s plan, were meant to apply to those who have been directly affected by COVID-19 – i.e. those who have themselves tested positive or live with a spouse or family member who has. The June 19th notice from the IRS has since expanded this policy to apply to all who have been financially impacted by the pandemic or live with someone who has. It also applies to those who have experienced a delayed start date for a job.

See the full guidance here.

This new guidance is best understood if broken into two distinct categories: first, withdrawals and their associated penalties; second, borrowing against 401k funds.


According to the new policy, anyone adversely affected by the pandemic is eligible to take a distribution of up to $100,000 from his or her retirement account. Spouses who are still employed may now make use of this option as well. Typically, withdrawals through tax-advantaged retirement plans come with a 10% penalty if early; however, the penalty is now negated on the withdrawal for all those under 59 ½ years old.

Additionally, those using 401ks or other workplace retirement plans that often have 20% tax withholding requirement will have the tax waived (IRAs are exempt of this requirement).

For those over 72, the minimum distribution requirement – which stipulates that these individuals must withdrawal a minimum amount annually or monthly – has been waived for both IRA and 401k holders.


Current policies around retirement accounts permit individuals to borrow the lower of $50,000 or 50% of their current balance. This has since been increased to $100,000 or 100% of one's account – it is now possible to borrow against the entirety of one's retirement balance. Borrowers will continue to be required to pay back loans within a five-year period, but now have the option to defer repayment for the year of 2020.

What you can do

The new provisions are meant to help cope with unprecedented circumstances; as such, they can add a source of timely cash flow for households in between work or dealing with the economic repercussions of the pandemic.

For others, two stipulations stand out.

  1. Spouses who have not been affected by the virus may take advantage of tax-free withdrawals, even if they continue to work as normal. This may be useful for those looking to reallocate funds away from a retirement plan previously hindered by the withdrawal penalty and/or withholding requirement.
  2. Retirement plan loans can be used for any purpose, so the ability to take a loan against the entirety of one's retirement balance may significantly expand borrowing activity.

Both options are a boon for investors in need of flexibility, providing a new means for getting extra cash on hand.