401k Hardship Withdrawal Under Coronavirus Cares Act

[James McCarthy]

I've been practically day trading in my 401K to reduce the losses from this mess, moving funds back and forth between stable value to stocks a few times a week. So far it has been working very well but one of my trades just violated the round trip rules in my plan and I got a warning. I still have a few available funds I haven't used so I can avoid another round trip for the time being, but not for long probably. My wife is a substitute teacher and she's basically out of a job until September. Can I get a hardship withdrawal of $100K from my 401k and avoid the 10% penalty under the Cares Act, then immediately deposit the money in an IRA and avoid the income taxes? Or will I still be subject to income taxes over 3 years if I don't put the money back into my 401k? We don't need the money. I'm just trying to create more flexibility to take advantage of the wild swings in the market lately. Any thoughts? Thx.

[George Blower]

Originally posted by @James McCarthy:

I've been practically day trading in my 401K to reduce the losses from this mess, moving funds back and forth between stable value to stocks a few times a week. So far it has been working very well but one of my trades just violated the round trip rules in my plan and I got a warning. I still have a few available funds I haven't used so I can avoid another round trip for the time being, but not for long probably. My wife is a substitute teacher and she's basically out of a job until September. Can I get a hardship withdrawal of $100K from my 401k and avoid the 10% penalty under the Cares Act, then immediately deposit the money in an IRA and avoid the income taxes? Or will I still be subject to income taxes over 3 years if I don't put the money back into my 401k? We don't need the money. I'm just trying to create more flexibility to take advantage of the wild swings in the market lately. Any thoughts? Thx.

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").