Coronavirus stimulus lets struggling Americans tap retirement accounts early

Lawmakers in Washington are making it easier for Americans struggling with the fallout from the coronavirus to draw on the trillions of dollars in their 401(k)s and other retirement accounts.

For a limited time, Americans would be able to withdraw money from tax-deferred accounts without penalties under a stimulus package approved by Congress on Friday. Rules on 401(k) loans would also be relaxed, and some retirees would avoid required minimum distribution rules that might have been onerous.

Some of the changes mirror what’s been done for retirement savers after previous disasters. In general, though, the adjustments are “much more significant than what was done for the California wildfires or the hurricane in Houston,” said Gregg Levinson, senior director of retirement services at Willis Towers Watson.

That’s needed because “with COVID-19, we are in uncharted territory,” said Will Hansen, chief government affairs officer of the American Retirement Assn. “With 3.3 million people filing for unemployment last week, I think we’ll see a lot more usage of these provisions.”

One provision in the bill would let investors of any age take as much as $100,000 from retirement accounts this year without paying an early withdrawal penalty.

They also could avoid taxes on the withdrawal if the money is put back in the account within three years. If it can’t be returned, taxes could be paid over three years.

The legislation requires that the money be a “coronavirus-related distribution,” but the rules are loose.

People diagnosed with the virus are eligible, along with anyone who “experiences adverse financial consequences” as a result of the pandemic, including an inability to find work or child care. Retirement plan sponsors are told to rely on employees’ word that they’re eligible.

The bill also makes it easier to borrow money from 401(k) accounts, raising the limit to $100,000 from $50,000. The payment dates for any loans due the rest of 2020 would be extended for a year.

When retirees reach their early 70s, they’re required to start taking money out of tax-deferred accounts such as 401(k)s and IRAs, and pay taxes on those distributions. The bill waives those rules in 2020.

Without the change, retirees’ required minimum distributions would be based on their account balances at the end of 2019, when the amounts were generally much higher than they are now. A similar one-year waiver was offered after the 2008 financial crisis.

U.S. individual retirement accounts, 401(k)s and other defined contribution plans held almost $20 trillion in assets at the end of 2019, according to the Investment Company Institute. Those totals almost certainly have dropped since then as global stock markets tumbled.

Though tapping one’s 401(k) may be a necessity at times, Levinson said people should view it as a last resort.

“Don’t mortgage your future if you have other options,” he said.

He thinks that the $100,000 loan amount allowed is too high and that people may jump at that number and later regret taking out that much.

Americans ages 25 to 55 pull about $69 billion a year from retirement accounts, according to a U.S. Government Accountability Office report issued last year.

Financial planners frown on the practice, even without the specter of taxes and penalties, because money withdrawn or borrowed from retirement accounts isn’t able to earn future tax-deferred returns.

The $2-trillion package was approved by the Senate late Wednesday and the House approved it Friday. President Trump signed the bill into law shortly after.

Steverman and Woolley write for Bloomberg.