The NCSL Blog


By Anna Petrini

As COVID-19 has brought millions of Americans closer to the financial brink, new federal rules relax restrictions on tapping retirement savings to cover emergency expenses. Policymakers hope these retirement cash infusions will help households avoid defaults, evictions and bankruptcies.

It should be a last resort, but it's easier than ever to break into your nest egg if you've been hurt by the coronavirus pandemic. GETTYThe Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law on March 27, 2020, and provides roughly $2 trillion in stimulus funds to address the devastating effects of the COVID-19 pandemic.

One provision frees up individuals’ retirement funds that would otherwise be subject to hefty penalties for early withdrawal. The law also increases the amount savers can borrow from 401(k)s.

Those younger than 59½ must ordinarily pay a 10% early withdrawal tax penalty, in addition to regular income tax, when they remove money from a traditional IRA, 401(k) or 403(b) retirement account. The new law waives that 10% penalty on distributions up to $100,000 that are made during 2020.

Retirement savers have three years to repay the withdrawn amounts before the federal tax consequences kick in (they still owe income taxes on withdrawn amounts that are not repaid). The law contains no limitations on how the funds can be used during the three-year period.

To be eligible for the waiver, savers must be diagnosed with COVID-19, have a spouse or dependent who contracts the disease or suffer a pandemic-related financial hardship. If you experience adverse financial consequences as a result of being quarantined, furloughed or laid off, or having work hours reduced, you may qualify for relief under the law.

In June, the IRS issued guidance expanding this list of eligible individuals and offering detailed examples of how distributions and subsequent recontributions are treated for tax purposes. Importantly, employers are not required to change the provisions of their retirement plans to allow for the benefits provided by the CARES Act.

How great is the need? Fidelity Investments found that 295,000 (1.2%) of its 401(k) plan participants took a CARES distribution in May. The average distribution was $12,500. Manufacturing and health care workers were by far the highest users of CARES distributions.

Efforts to make it easier to tap retirement plans in emergencies have been underway for years. Since Hurricane Katrina in 2005, Congress has expanded 401(k) loan limits and allowed penalty-free 401(k) and IRA withdrawals for people affected by several natural disasters.

Some research suggests that few people made early withdrawals from their retirement savings during the 2008 financial crisis and its aftermath. Not surprisingly, advice abounds about how best to preserve long-term savings and meet urgent cash demands in the current age of uncertainty.

Some financial experts caution that pulling money out of retirement accounts now might harm less-sophisticated investors. In volatile markets, those most in need of emergency funds risk selling low now and buying high later, forgoing years of investment gains if only they’d left their money untouched.

For every $1 contributed to retirement accounts by or on behalf of savers under age 55, $0.40 leaks out—and that does not include loans. Retirement account leakage can present a significant problem for low-income and minority savers, in particular.

Policymakers are exploring a range of options to help Americans achieve long-term savings and short-term economic security, during the pandemic and beyond. Policymakers at all levels of government acknowledge this requires imaginative thinking, leadership from the public and private sectors and bipartisan cooperation.

Check out NCSL resources on retirement security.

Anna Petrini is a senior policy specialist in NCSL’s Employment, Labor and Retirement Program.

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About the NCSL Blog

This blog offers updates on the National Conference of State Legislatures' research and training, the latest on federalism and the state legislative institution, and posts about state legislators and legislative staff. The blog is edited by NCSL staff and written primarily by NCSL's experts on public policy and the state legislative institution.