CARES Act: Enhanced Loans From Employer Retirement Plans

Background: Previously, if you ever needed to request a loan from your 401(k) or 403(b) plan, you’d be restricted to the lesser of 50,000 or 50% of your vested account balance. Meaning if your vested balance was 90,000, you’d be limited to 45,000 (90k * 50%) as that is less than 50,000. The CARES act effectively doubles both of these prior limits. Now it’s 100,000 or 100%, but keep in mind it’s still the lesser of. As an added bonus, you can also elect to defer payments on your 401(k) loan for one year.

Timing: This is only a temporary adjustment for 180 days. So if you are wanting to take a loan, it must be initiated and completed before 09/19/2020.

Details: Employer Retirement plan loans have always been tricky. If you have other means to come up with cash and you don’t have to, we don’t recommend you take a plan loan. 

One of the biggest pitfalls is that if you terminate from your employer, you would need to pay it back in full.

If you can’t, you would have to recognize the remaining balance of the loan as a distribution and potentially be subject to a 10% penalty on top of any income tax. There’s just too much uncertainty and a high cost associated if something goes wrong.

All that to say, if other options are not available to you and you need the funds, this could be an option if you have been affected by the Coronoavirus. So what’s changed with the CARES act? 

	Before	CARES Act Change
Max Loan Amount	$50,000	$100,000
% Amount Available	50%	100%
Delay of Payments	N/A	One Year

To recap, the limits on how much you can take have effectively doubled, but that does not mean this is your best option. It’s important to review all of the options available to you and make an informed and intentional decision that best fits your circumstances.

---

Interested in the other areas of the CARES Act? We are breaking down these details by section in the following resource. You can click to the particular section you’re interested in directly below if you’d like to read the specifics of those first.  We do encourage you to look through all of the sections that could potentially impact you since this is a very generous bill aimed at keeping our country’s economy strong during and after this pandemic.

Financial Design Studio CARES Act Summary

Like any benefit that becomes available to you it is critical to see if it makes sense to use the provisions allowed.  While a benefit might make your temporary financial situation better, it might not be beneficial in the long term. However, those who need these provisions were created for are likely in immediate need to use the benefits until employment returns to normal.

Individuals:

Recovery Rebates

Coronavirus-Related Retirement Distributions 

Enhanced loans from employer retirement plans

Required Minimum Distributions waived for 2020 

Qualified Charitable Contributions – NEW Above the line deduction 

AGI Limit for Cash Charitable Contributions Limit Temporary Repealed

Student Loan Borrower Relief

Miscellaneous Healthcare Benefits

Unemployment Benefits

Mortgage Forbearance Request

 

Business Owners:

Paycheck Protection Program & Forgivable Loans

Employee Retention Credit

Payroll Tax Payment Deferral 

Net Operating Losses Loosened

Wondering how this affects your future finances? Schedule a call with Financial Design Studio, financial advisors in Deer Park, to discuss your portfolio today.

 

---

VIEW MORE FROM FINANCIAL ADVISORS IN DEER PARK