COVID 401k loan or distribution?

Question

I had COVID (totally no big deal), so I'm allowed to take money out of my retirement accounts.  Any thoughts on this?  Anyone doing this?  My vision is taking out the cash, BRRRR, repay within 3 years and viola I got a free loan from myself.

And how much should I take out?  Is this a good opportunity to jump into a multifamily?  We've got 2 SFHs that we bought for approx 135k each.  I'm used to being all in for $50k, time to up the ante?

Anna Catron · Answer

@Ronald Rohde because in our mind, those aren't for investing.  They're for true emergencies.  Buying assets isn't an emergency.  We have 3 super active outdoor kids, the reserves are for when they all 3 do something stupid in the same week that all of our tenants break the lease. I know, it's crazy, but that's how we roll!

Juan Deshon · Answer

You will want to discuss with your tax professional on what would be best and what tax implication you may incur. A corona virus related distribution is still a taxable event. There are distributions from an IRA and loans from a 401k. Both different. Info on CRD's:

A Coronavirus-Related Distribution (CRD) of up to $100,000 in the aggregate for any taxable year may be made from all retirement plans in which an individual participates (IRA, QP, 403(b), or governmental 457(b)), if applicable.

A Coronavirus-Related Distribution (CRD) is a distribution made on or after 1/1/2020 and before 12/31/2020 to an individual:

•Who is diagnosed with COVID-19 or SARS-CoV-2 by a test approved by the Centers for Disease Control and Prevention;

•Whose spouse or dependent is diagnosed with COVID-19 or SARS-CoV-2;

•Who experienced an adverse financial consequence as a result of being quarantined, furloughed or laid off, or having work hours reduced due to COVID-19 or SARS-CoV-2; or

•Any other factors determined by IRS/Treasury.

If a CRD is taken by an individual, they will include the amount received into income, spread ratably over a 3-year period. The 3 year taxation is the default, but taxpayers may elect to pay taxes on the full amount for the year of distribution.

The CRD will not be treated as an eligible rollover distribution for purposes of withholding, so no withholding need apply to the distribution.

However, the CRD amount may be repaid as a rollover into an eligible retirement plan (IRA, QP, 403(b) or governmental 457(b)) that can receive rollovers within 3 years, measured from the day after the CRD was received.

The 10% additional tax on early distributions will not apply to a coronavirus-related distribution (CRD).

Chris Levarek · Answer

@Anna Catron I think this is a great opportunity to use these funds. Both the loan or the withdrawal are good options in my opinion. Depending on what you are looking to do, either could be beneficial.

If you are looking to do those short term finance type deals, BRRRR or flips, that strategy looks to be a good one. Even the loan at 100% or 100k will have a interest rate that would beat out any private lender, hard money loan and give you up to 6 years to pay it back with no payments in 2020.

If you want to jump into large multifamily, you could even look at simply having a depreciation from the purchase of a large asset offset your taxes due even if it was past the three year mark. Cost segregation on an apartment complex with 100% bonus depreciation could be quite beneficial. Whether investing in someones else deal or your own.

Alternatively, a refinance on a multifamily in year 3, common approach in apartment syndications for example, could allow you to pay back the withdrawal amount in any case from the equity return.

Lot of options, what are your goals?

George Blower · Answer

1) Yes you can take both a CARES Act Loan and Distribution if you qualify.

2)  Keep in mind that in order to take a distribution under the CARES Act you must have been impacted by the virus in one of the enumerated ways & your current account provider must allow you to take a CARES Act distribution. The IRS recently provided guidance regarding eligibility under the CARES Act and specified that a qualified individual includes an individual who has a reduction in pay (or self-employment income) due to COVID-19.Note: It is too late to take a loan under the CARES Act.

Distributions:

If so, you can take a penalty-free distribution (as well as waive the 20% withholding requirement) from your 401k (assuming that the employer allows it) anytime between 1/1/2020 and 12/31/2020. You may avoid the taxes if you deposit the funds in an eligible retirement plan (which includes anIRA) within "3 years and a day" of the date of the COVID-19 distribution (note: compare to a 60-day rollover). Please note that the account into which the funds are deposited must be the same type of account from which the funds were first withdrawn (e.g. withdrawal of pre-tax funds from a 401k could be deposited in a pre-tax IRA but not a Roth IRA - "like to like").

Rodney Menendez · Answer

@Juan Deshon

Thanks for the info. If I already took a $100k loan from my Solo 401k (in July 2020), can I also take a $100k distribution before the end of 2020?

Ronald Rohde · Answer

Gotcha, as long as you have a solid reasoning and logic, I'm all in favor of taking the (calculated) risk.

Ronald Rohde · Answer

This is the part I don't understand, if you have cash reserves to cover a shortfall, why not just use those funds to invest?

Mindy Jensen · Answer

@Anna Catron, if you don't pay it back, the regular taxes apply, but fees are waived for coronavirus-related withdrawals.

Anna Catron · Answer

Yep, yep, and yep!  @Mindy Jensen @Juan Deshon @Ronald Rohde @Alina Trigub

Y'all have all confirmed the information I'd gathered.  My plan is to take a 30k distribution, use it for a casa, regular BRRRR deal, and pay it back before 3yrs.  If I can't pay it back in its entirety, my understanding is it turns into a regular loan with the regular tax/penalty implications. Being quite meticulous w money, I'll pay it back.  Worst worst worst case scenario, that's what cash reserves are for!

One final question.  A friend said when I put it back in, the money will have been protected from losses during the distribution time??  Any ideas?

Thank you soooo much!  My pro membership just paid for itself!  Now, to work on the spouse!

Mindy Jensen · Answer

@Anna Catron, you will pay tax on 1/3 of the distribution each of the three years. If you pay it all back within 3 years, you would have to file amended returns. That isn't to say that doing this is a good or bad idea, just know that you pay tax upfront, so you don't get a surprise tax bill next year.

COVID 401k loan or distribution?

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