New Covid Aid Law Waives 10% Penalty On Pre-59½ Retirement Plan Withdrawals

Published Tuesday, December 29, 2020 at: 10:18 PM EST

The new $900 billion Covid relief package is the fifth major federal law enacted in response to the COVID pandemic and economic crisis, and the first since April. Apart from funding the new relief, Congress sensibly expanded on previous aid legislation by targeting individuals, families, and small businesses hit hardest financially.

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A major change in the new aid package allows withdrawal of up to $100,000 from your retirement plan penalty-free, even if you’re less than age 59½. Normally, a 10% federal tax penalty is assessed on distributions from a qualified retirement plan if you’re younger than 59½, but the penalty is waived in 2021.

If your financial situation improves, you may restore the withdrawn amount for up to three years. So it’s like loaning yourself money for up to three years. Of course, you lose the compound growth on that money.

Withdrawals from a retirement account is never a great idea, even if it is a loan that you pay back. However, if you are not meeting your expenses and in danger of losing your home, a withdrawal or loan may be a good option.

If you are withdrawing money from a retirement account before age 59½ to keep your business from bankruptcy or for some other reason, it’s wise to assess the risk versus reward with a critical eye. Business owners sometimes need an objective opinion to avoid chasing a dead dream, and qualified retirement plan assets are not subject to creditor claims in the event your business goes bankrupt.

Feel free to ask us about the new Covid relief rules permitting penalty-free withdrawals of up to $100,000 on qualified retirement plans before you’re 59½, or if you are weighing the risk and reward of a pre-59½ retirement plan withdrawal.

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