Ask Bob: Can I Withdraw Money From My 401(k) Without Penalty If It's Due To A COVID-19 Related Job Loss?
Robert Powell, CFP®
Am I eligible to withdraw money out of my 401(k) without penalty, if my spouse lost her job due to the COVID-19 disruption? We file our taxes jointly and the work stoppage affects our overall household income. I would appreciate your input.
The answer, says Dan Galli, CFP, Daniel J. Galli & Associates, is “maybe.”
The CARES Act, he explains, allows 401(k) plans to modify their plan rules to allow COVID-19 related distributions. To qualify for a COVID-related distribution, either the plan participant or their spouse must have contracted the coronavirus or have experienced an adverse financial consequence because they have been quarantined, furloughed or because their hours at work were cut. “You appear to meet these criteria,” he notes. “However, each 401(k) plan must agree to modify their plan to allow for these COVID-19 related withdrawals.”
If allowed, Galli says, the withdrawals will be taxable but the 10% penalty for withdrawal prior to age 59 ½ is waived. Additionally, no tax withholdings have to be made, the tax burden can be spread over 2020, 2021 and 2022, and, the withdrawal can be paid back within three years and you can request a refund for taxes paid.
“The key question is whether your 401(k) plan has agreed to allow for the CARES Act provisions,” he says. Check with the administrator of your 401(k) for the answer. If it’s yes, they will most likely have a special form or procedure for you to take the withdrawal.
Got Questions? Get Answers!
Got questions about Social Security, Medicare, retirement, investments, or money in general? Get answers. Email Robert.Powell@Maven.io. Kim McSheridan assisted with this report.