You Can Borrow More Money From a 401(k) Via The CARES Act

May 26, 2020

Levers of opportunity can be found in chasms of adversity, if you look for them.

Sometimes we can’t find accessible money because we’re too busy looking for it and commiserating over bad luck.

I was financially illiterate for most of my life, rented apartments for over a decade, and have never owned a brand spanking new home.

For the past several years, I have been researching how to get more money, buy a home, and then use that home to start a business.

I used to have a retirement account that I could have used the CARES Act to leverage into a loan to do these things.

Home ownership is supposed to be a dream, but the reality can be anything but that.

The average new home costs $321,000. Meanwhile, the average salary is $48,700.

I used to have an asset, a retirement account from my teaching years, which I converted into an annuity.

It was the dumbest thing I ever did.

In this time of horrifying need, I could have borrowed against it, penalty-free, via the CARES Act.

The Coronavirus Aid, Relief, and Economic Security Act was passed by Congress and signed into law in March 2020. The $2 trillion economic impact benefits bill offered immediate stimulus payments, loans, and bill payment relief to Americans impacted by the coronavirus pandemic.

You should know that if you have a 401(k)-retirement account, you can borrow against it without penalty.

The CARES Act has made it easier.

Borrowing Against Your 401(k) Via the CARES Act

A 401(k)-retirement plan lets you defer a percentage of your paycheck to fund a future retirement. You can also use it to invest.

401(k) plans are also tax deferable, meaning you pay a tax on withdrawals as they occur.

However, if you withdraw money before the age of 59 and six-months, you’ll incur a 10% penalty.

Taking out a loan against your 401(k) to buy a new home is now easier due to the CARES Act.

As long as the loan is being used to pay for a mortgage down payment, it’ll be penalty and tax-free.

You can borrow up to half of your 401(k) balance, but no more than the maximum of $50,000.

Most 401(k) loans must be repaid within 5 years. If you’re using the loan to buy a new home, those repayment terms can be extended.

If you get fired or laid off, you’ll have to repay the loan before your next tax filing. If you don’t, you’ll pay taxes on outstanding balances and be hit with a 10% penalty if you’re younger than 59 and 1/2.

If you can prove to your 401(k) administrator that you or a relative contracted COVID-19, or face economic devastation because of the pandemic, you may be able to borrow $100,000 against your plan.

The 10% withdrawal penalty for those younger than 59 ½ will be waived if you’re personally affected by it.

Also, tax payments will be deferred over a three-year period. Repayment terms are also eased.

If you’ve been personally afflicted by the coronavirus, talk to your 401(k) administrator about your options.

There are hard times, but opportunities may be available.

I would do the same if I had still a retirement account.

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