CARES Act 401(k) Withdrawal Guide

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on February 15, 2024

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Because of the financial difficulties the COVID-19 pandemic had caused, the US Congress introduced the CARES Act, which stands for Coronavirus Aid, Relief and Economic Security.

In general, this act allows families who are struggling with financial issues to take a 401(k) withdrawal.

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What Is the CARES Act 401(k) Withdrawal?

A $2 trillion-bill was passed by U.S. lawmakers back in March 2020 called the CARES act which aims to help Americans who have been affected by the COVID-19 pandemic.

The act provides access to retirement funds from 401(k) plans.

The CARES Act 401(k) Withdrawal allows those with a 401(k) plan to withdraw their funds for financial hardship reasons relative to the COVID-19 pandemic without being penalized.

The bill was signed into law on March 27, 2020 by President Donald Trump.

How Does a CARES Act 401(k) Withdrawal Work?

Normally, withdrawals made from a tax-deferred retirement account by a participant who has not reached the age of 59 1/2 is subject to a 10% early withdrawal penalty.

The said withdrawal will also be considered part of their taxable income for the year.

A few exceptions have been made to this general rule, such as, situations of foreclosure of property, post-disaster home repairs, and medical expenses.

The amount to be withdrawn is limited according to the specific amount needed for each situation.

The CARES act has allowed greater flexibility compared to the typical situations that allow for 401(k) withdrawals, especially because the CARES act has lifted the 10% early withdrawal penalty.

Withdrawal amounts have also been limited up to $100,000 per participant without tax penalty but will be included as part of the participant's taxable income for the year.

To make it even more flexible and beneficial, participants are given the option to pay federal income taxes associated with the amount withdrawn over a three-year period.

He/She may also avoid the tax consequences by repaying the distribution amount over the same length of time.

The basis of the three-year period is the time when the distribution was made.

Who Is Eligible to Take a CARES Act 401(k) Withdrawal?

A qualified individual is someone who:

  • has been diagnosed with COVID-19 by a test taken and approved by the Centers for Disease Control and Prevention. A participant's spouse or dependent who has been diagnosed by the same will also be counted as qualified, or
  • has gone through adverse financial consequences resulting from certain events relative to the COVID-19 pandemic.

    These may include situations such as being quarantined, laid off, furloughed, or work hours have been reduced due to the pandemic.

Individuals whose businesses may have been closed or operating hours have been reduced may also qualify.

Individuals whose jobs have been rescinded or job starts have been delayed because of the pandemic are also qualified.

You may read more of CARES act eligibility through the Notice 2020-50, Guidance for Coronavirus-Related Distributions and Loans from Retirement Plans Under the CARES Act.

How to Process a CARES Act 401(k) Withdrawal?

Plan participants should reach out to their plan administrators to get help in processing a 401(k) withdrawal relative to the CARES act.

Typically, the participant will need to furnish a withdrawal form, along with sufficient documentation to give proof to the COVID-19 hardship situation he is in.

The request shall be scrutinized by the designated person responsible for the assessment of the participant's hardship situation.

If the participant qualifies per the eligibility requirements set by IRS, the request shall be processed.

An applicant should note that the processing will take weeks depending on the plan administrator.

Should a participant's request be denied, he or she will be duly notified by the plan administrator.

Form 1099-R will then be issued by the plan administrator to the qualified participant at the end of the year to record the taxes to be taken from the distribution amount.

A copy of this form will also be furnished by the plan administrator to the IRS.

Participants will use the Form 1099-R to accomplish their tax return via Form 1040. Forms 8915-E will likewise be completed by the taxpayer, along with his or her individual tax return.

How Will the 401(k) Distribution Affect My Retirement?

While the CARES act 401(k) withdrawal may be beneficial in a lot of ways to qualifying participants, it is equally important to consider many factors that could affect their retirement in the long run.

Here are a few things that might affect retirement should a 401(k) withdrawal be done:

Low Principal Savings Amount

Withdrawals taken from the principal savings amount will decrease the total principal savings amount.

Without principal, retirement income will be lower. As such, participants must consider this factor when taking a withdrawal relative to the CARES act.

Time and Compounding Interest

Retirement savings are greatly affected by time and interest because the longer the period of time the principal savings amount is invested, the more money will be generated through interest.


401(k) withdrawal is taxed like regular income under certain conditions which could lessen the value of the withdrawal over time.

Having an Excess Amount in Cash

When individuals take out large sums from their accounts through CARES-related distributions, it can take time for them to accumulate enough savings once more to begin investing again.

They might find themselves having an excess amount of cash that might not have any growth in some time.

Missing Potential Gains

Any withdrawals made from a 401(k) account will mean missing on potential gains the savings would have earned along the way.

Impact on Required Minimum Distribution (RMD)

At the end of the year, participants are required to take their RMD according to IRS rules for taxation purposes.

A CARES act 401(k) withdrawal adds up to this amount and may affect subsequent years' RMD requirements if not monitored properly.

Should I Go For 401(k) Loan or 401(k) Withdrawal?

Here are a few points to consider whether it is better for a participant to go for either a loan or withdrawal from a 401(k) account:

401(k) Loan

  • Loan needs to be repaid within a specified time frame.
  • Loan amount isn't taxable initially and no penalty can be taken from it also. Taxes will only be charged if a participant is unable to pay back the balance within the specified time frame.

    A ten percent early withdrawal penalty may only be charged if the participant is under 59 1/2 years old.

401(k) Withdrawal

  • Participants aren't required to repay the amount withdrawn but may opt to.
  • No early withdrawal penalty will be charged.
  • Amount withdrawn from the account will be part of taxable income at year end but the participant has the option to repay it within 3 years to avoid taxes.

Final Thoughts

The CARES act 401(k) withdrawal is a good provision for individuals who have been impacted by the coronavirus and are in hardship situations.

Eligibility factors, however, must be carefully studied to avoid mistaken payments from being made.

CARES act 401(k) withdrawals are beneficial for people who have lost their income because of the coronavirus and are not in a position to make further contributions.

For many, however, there is still more work that needs to be done before they can continue with their retirement plans.

In this light, it is best to carefully assess why you want to take a withdrawal from your account.

Carefully read all eligibility requirements and understand what tax implications come with taking out funds from your accounts under these provisions.

CARES Act 401(k) Withdrawal FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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