The Coronavirus Aid, Relief and Economic Security Act (the CARES Act) was passed by Congress in an attempt to assist individuals and businesses impacted by the ongoing pandemic of COVID-19. As part of the CARES Act, laws have been enacted making it with much it easier for individuals to access their retirement savings earlier than they typically would be allowed without paying a penalty and being able to defer income taxes on these distributions for three years.

If you withdrew money from your retirement plan prior to 2020, you had to pay a 10% penalty for the early withdrawal if you were younger than 59 ½. You also had to pay income taxes on the amount withdrawn and could not return the money to your retirement account. Under the CARES Act, temporary relief from these provisions of the tax code were instituted. For withdrawals from retirement accounts during 2020, the 10% penalty has been waived. These early withdrawals have been exempted from the 20% mandatory withholding that applies to some retirement accounts. Additionally, as long as the distribution is repaid within three years, no income tax will be owed on the early distributions. If you choose to pay the income taxes over three years and then repay the distribution, you may file amended tax returns.

The CARES Act also doubles the amount of ordinary retirement plan loans to the lesser of $100,000 or 100% of the participant’s vested account balance. No interest will be owed on the loan if you repay the loan within five years. However, employers are not required to modify their retirement plans for employees to account for these temporary measures.

To qualify for these relaxed withdraw rules, you or a family member must test positive for COVID-19 or you must suffer financial hardships due to a reduction in hours, wages or being laid off due to COVID-19.

While taking a distribution under these temporary provisions of the tax code might appear attractive, it is strongly recommended that you avoid taking a distribution unless absolutely necessary because while you may intend to repay the distribution, chances are good that you will not be able to or will not have the ability to repay it within the three year period of repayment required. If you are not able to repay it, you will have raided your retirement account and will not have it when you are ready to retire.

Additionally, there are many entities that are touting as an advantage the ability to take the distribution to invest in sometimes risky and speculative investments, some with guaranteed returns. This is not a good reason for taking a distribution that you otherwise do not need. If you lose the money you invest, you will have raided your retirement account, owe income taxes and have lost your retirement money.

Before you decide taking a distribution, it is recommended that you discuss it with your accountant or financial advisor to determine if you should take the proposed distribution. For further information on the tax rules and regulations covering COVID-19 distributions, please refer to the IRS website and click on the coronavirus relief for retirement plans. And watch out for fraudsters and scam artists preying on people who have taken a COVID-19 distribution.