CARES ACT: Penalty Free $100K Loan from 401K?

Question

Hey everyone, the new CARES Act allows for us to make a loan up to $100K from our 401K penalty free that doesn't have to be paid back for 3 years as long as you can show hardship 2/2 to the coronavirus. Does anyway know if this loan is interest free as long as it is paid back in 3 years? I was thinking of using it to buy a multifamily property.

George Blower · Answer

Good to hear - thanks for sharing your experience

George Blower · Answer

@Jaysson Brooks

@Chris Levarek

Here are the details regarding the loans:

NEW LOANS:

The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.

Specifically, you must be an individual who meets one of the following conditions to demonstrate that you have been impacted by the crisis (and it will be your responsibility to retain documents in your files that demonstrates that you are a qualified individual):

• Individual who is diagnosed with COVID-19, with a CDC-approved test;Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; ORIndividual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.
• Individual who is diagnosed with COVID-19, with a CDC-approved test;
• Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; OR
• Individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.

• Individual who is diagnosed with COVID-19, with a CDC-approved test;
• Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; OR
• Individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.

On or before September 23, 2020, such individuals take a 401k participant loan subject to the following terms:

• Maximum Amount of the Loan: 100% of their 401k balance not to exceed $100,000.  Please note that per the multiple loan rules, the amount of the loan must be reduced by the highest outstanding balance of any other 401k participant loan over the prior 12 months (regardless of whether such other loan is currently outstanding).
• Monthly or Quarterly Payments: The loan must be paid back in equal monthly or quarterly payments of principal and interest.
• Interest Rate: The interest rate is equal to prime plus 1% (or CD rate plus 2%) and is a fixed rate that is set at the time that the loan is taken.
• Term of the Loan: Five-year term unless the proceeds of the loan are used to purchase a primary residence in which case the term of the loan may be up to 30 years.
• First Payment: For monthly payments, the first payment that would otherwise be due is delayed until January 2021 (e.g. if the first monthly payment would have been due on May 15, 2020, it will be due on January 15, 2021).For quarterly payments, the first payment that would otherwise be due is delayed until the first quarter of 2021 (e.g. if the first quarterly payment would have been due on May 15, 2020, it will be due on February 15, 2021).
• For monthly payments, the first payment that would otherwise be due is delayed until January 2021 (e.g. if the first monthly payment would have been due on May 15, 2020, it will be due on January 15, 2021).
• For quarterly payments, the first payment that would otherwise be due is delayed until the first quarter of 2021 (e.g. if the first quarterly payment would have been due on May 15, 2020, it will be due on February 15, 2021).

• For monthly payments, the first payment that would otherwise be due is delayed until January 2021 (e.g. if the first monthly payment would have been due on May 15, 2020, it will be due on January 15, 2021).
• For quarterly payments, the first payment that would otherwise be due is delayed until the first quarter of 2021 (e.g. if the first quarterly payment would have been due on May 15, 2020, it will be due on February 15, 2021).

EXISTING LOANS:

The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.

Specifically, you must be an individual who meets one of the following conditions to demonstrate that you have been impacted by the crisis (and it will be your responsibility to retain documents in your files that demonstrates that you are a qualified individual):

• Individual who is diagnosed with COVID-19, with a CDC-approved test;Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; ORIndividual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.
• Individual who is diagnosed with COVID-19, with a CDC-approved test;
• Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; OR
• Individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.

• Individual who is diagnosed with COVID-19, with a CDC-approved test;
• Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; OR
• Individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.

If you meet the above conditions:

• You may delay making any 401k loan payments due between 3/27/2020 and 12/31/2020.
• You must commence making loan payments in January 2021 (or the first quarter of 2021 if your loan payments are due on a quarterly basis).
• If you elect to delay making such loan payments, the term of your loan will be appropriately extended.  For example, if there are 10 monthly loan payments remaining on your 401k participant loan and the next payment is due April 15, 2020, you can elect to delay making such payments until January 15, 2021 and at that time would need to make 10 more monthly payments through October 15, 2021.

Chris Levarek · Answer

@Jaysson Brooks First always good to consult with your 401k intermediary and second I am not a CPA :)

However, for the loan :You can now take up to $100,000 or 100% of your balance, whichever is less. You actually do not need to make a payment until 2021. Then you would have 5 years to repay.

Any outstanding existing loans on your 401k, you are allowed to not pay any payments for 2020. And you can add your new 401k loan to this amount and again not pay until 2021 as stated.

So, with those terms, I'd say it's pretty attractive depending on how you use the funds.

Aaron K. · Answer

It is a loan from yourself, unless I'm misunderstanding.  Meaning you take money out of your retirement account (almost always a bad idea because it is tax advantaged) and you have to put it back in there before the term is up or face the penalties.

Marco Bario · Answer

Good summary regarding the loans @George Blower. I scaled up my business several years ago using a loan from my Solo 401K. For me, it's worked out quite well.

George Blower · Answer

What you are referring to was authorized under the CARES Act which is one of the recently enacted stimulus bills in response to the COVID-19/Coronavirus Crisis.

Please note the following details:Assuming that you have been impacted by the virus in one of the enumerated ways and therefore qualify, 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 an IRA) 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").

Jasmine H. · Answer

@Jaysson Brooks any interest on the loan is basically paid back to you since you are borrowing your own money.

Calvin Thomas · Answer

This would an incredibly unwise idea. The only reason why anyone would do this is if they had a real emergency. Borrowing to borrow in real estate is a bad idea.

Brian Eastman · Answer

@Jaysson Brooks

The provision you are speaking of with a 3 year period is not a "loan".  It is the ability to take a taxed distribution from the IRA/401(k) with a waiver for the additional 10% penalty that normally applies to an early distribution prior to age 59 1/2.

Due to the need to pay taxes and the cost of needing to amend prior year returns to get those taxes back, this is not likely "easy access short term money for investing".  If you are in dire a financial situation due to COVID-19 it is a lifeline.

Separately, there were changes to the 401(k) participant loan provision associated with the CARES Act.

Please consult with a licensed tax advisor familiar with the specifics of your situation before pursuing these avenues.

CARES ACT: Penalty Free $100K Loan from 401K?

Most Popular Reply