Help Readers Weigh the Pros and Cons of 401(k) CARES Loans

by June 1, 2020
Many Americans make savings one of their New Year's resolutions. This data should jump-start a business story. ("Attack of the Piggy banks" image by "Low Jianwei" via flickr, CC B Y 2.0)
Help your readers weigh the pros and cons of a CARES loan by looking into these questions.(“Attack of the Piggy banks” image by “Low Jianwei” via flickr, CC B Y 2.0)

In addition to economic stimulus checks, the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, allows U.S. workers, small business owners, and retirees affected by COVID-19 to take out interest-, penalty- and tax-free loans of up to $100,000, or 100 percent, and whichever is lower, from their 401(k) and other retirement accounts.

The new rules apply specifically to those who lost income after being furloughed from their jobs, or quarantined;  had to stay home to care for their children; or business owners forced to cut operating hours or shut down their businesses.

Help your readers weigh the pros and cons of a CARES loan by looking into these questions:

What exactly does CARES allow?

The retirement provisions of CARES are only in effect until Sept. 23, 2020, which makes it critical to clarify what CARES is, and is not. For example, employers aren’t required to offer loans under CARES. Here’s a brief summary:

  • CARES doubles the withdrawals allowed on 401(k) plans, a personal retirement account, or a combination of these accounts from $50,000 to $100,000.
  • Loans can be paid back over three years instead of the typical 60 to 90 days, and any taxes paid are refunded;
  • Under CARES, those under the age of 59½ can withdraw without paying the 10 percent penalty;
  • In addition, the legislation lifts automatic withholding for taxes, which typically requires at least another 20% of account value;
  • CARES waives Required Minimum Distributions (RMDs) from retirement accounts until 2021.

This backgrounder from U.S. Senator Chuck Grassley (R-Ia) offers more information and contacts.

Will CARES benefit me?

Ask readers who qualify for this CARES benefit who have applied, or are considering, a CARES loan, to join a panel to discuss their decision. Also include a few Certified Public Accountants (CPAs) and financial planners who serve clients in various income levels, and across different age groups and occupations.

A global pandemic on top of a recent market downturn makes it a tough time to weigh this question. In the first quarter of 2020, account balances from the previous quarter fell from $112,300 to $91,400 on 401(k) plans and from $115,400 to $98,900 on Individual Retirement Accounts (IRAs), according to Fidelity, considered the largest record-keeper with 16.2 million accounts.

Which is better for me—a 401(k) loan or a distribution?

Interest-, penalty- and tax-free CARES loans are a benefit if they’re paid back over the short term, but American consumers haven’t had the best track record in paying back 401(k) loans. In any five-year period, two in every five workers take out 401(k) loans,  according to a 2017 study from the Pension Research Council at the Wharton School of the University of Pennsylvania. But over twice that number—86 percent of workers—defaulted on their loans after leaving a job, according to the National Bureau of Economic Research (NBER).

Loans and distributions both take money away from future financial gains, so tread carefully, say financial advisors.  What other financial alternatives are there to consider?