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What are the consequences if I withdraw money from my 401(k) or IRA?

5 min read


5 min read


Our lives are flipped upside down right now due to the coronavirus. As Americans deal with new health and financial realities, many of us are making tough choices. If you’re facing this reality and are considering withdrawing retirement money from your 401(k) or IRA, we’ll help you understand the rules and what factors to weigh as you make your decision.

You might have heard that the CARES Act stimulus bill relaxes rules around taking 401(k) loans and IRA withdrawals. Specifically, the new rules let you tap into your retirement savings without penalty if you meet certain criteria – up to a generous maximum of $100,000.

Dipping into your retirement account can mean quick access to cash, but it’s not a decision you want to take lightly. Let’s first walk through the terms the CARES Act has laid out. Then, we can review what you should know upfront before you make your next financial move.

Unemployed and have tax questions?  Be sure to visit our Unemployment Resource Center.

How to get a penalty-free hardship withdrawal from your 401(k)s or IRAs

The CARES Act has made it easier for those directly facing financial and health issues from the effects of the coronavirus pandemic to cash out retirement funds. With the new rules, you might be able to take a penalty-free distribution from your 401(k) or your IRA.

Normally, taking an early distribution withdrawal from your 401(k) or IRA means you’d pay a 10% penalty. For example, if you took out $10,000, you’d actually lose $1,000 to the penalty.  Thanks to the new hardship withdrawal designation, you don’t have to forfeit the $1,000 if you’re an eligible person.

Who is eligible for a coronavirus hardship 401(k) or IRA withdrawal?

The new rules to take a withdrawal from your retirement will apply to you, if:

  • You have been diagnosed with SARS-CoV-2 (also called COVID-19) by a CDC approved test.
  • Your spouse or a dependent has been diagnosed with SARS-CoV-2 by a CDC approved test.
  • You’ve experienced “adverse financial consequences” due to the pandemic. Here’s what that means. You or your spouse:
    • Are being quarantined, furloughed or laid off. Or, you’re working less because of the virus or disease.
    • Are unable to work due to lack of childcare because of the virus or disease
    • Own or operate a business and you’ve lost hours or had reduced hours due to the virus or disease

What other rules are there?

  • The distribution period covered is January 1, 2020, to December 31, 2020. So, if you took a withdrawal back in February and the eligibility requirements apply, you won’t owe the penalty.
  • There are tax implications of taking this type of withdrawal. See the next section.

401(k) & IRA hardship withdrawals: 4 coronavirus considerations

Retirement accounts were designed for life after your last paycheck. Both 401(k)s and IRAs come with tax advantages to encourage you to put money in them — and penalty rules to encourage you to keep the money there. That said, there are important differences with these plans beyond your regular bank savings accounts.

1. Your distribution will be taxed as income — but you might be able recoup those taxes if you follow the rules. Traditional 401(k)s and IRAs generally hold pre-tax dollars. When money is distributed, you normally owe income tax for that tax year. Based on the CARES Act rules, you can spread this income over three tax years, so you won’t have to pay it all at once.

However, there’s an exception available: If you can repay your account within three years of taking the money out, you can amend your tax returns and get back the taxes paid. Don’t worry about going over your annual max contribution that year if you do this. The repaid funds won’t count towards that limit.

Note: If you have a Roth IRA, you can always take your contributions out penalty free, as long as you’ve met the five-year rule. Check out the normal early withdrawal rules for Traditional and Roth IRAs.

2. Your options change depending on if you tap into your 401(k) vs. your IRA. When it comes to retirement accounts, one of these things is not like the other. Here’s a comparison:

401(k) details:

  • If you’re still employed, you have to get your company’s approval to take the withdrawal or a 401(k) loan.
  • If you take a loan, you will have to repay the loan. If a round of layoffs come and you lose your job, you’ll have to pay the loan from your 401(k) back by that year’s tax return deadline if you follow the rules for a plan loan offset.

IRA details:

  • You don’t need anyone’s permission to take an IRA hardship withdrawal. You just need to meet the requirements to be sure it’s penalty free. And for comparison’s sake, IRAs don’t offer loans.
  • Because IRAs aren’t tied to your work, your employment status won’t matter where your emergency IRA withdrawal is concerned.

3. You could lock in investment losses. Among all of the other economic concerns, the pandemic has not been kind to the financial markets. If you’re like many investors, your retirement accounts have probably taken a big hit. If your accounts hold stocks that have dropped considerably and you redeem now, it’s highly likely you’ll be selling shares at a much lower price than what you paid. Rolling the money back in three years later won’t make up for that.

4. You might have other means of staying afloat. While you’re considering the “Should I withdrawal money from my 401(k) or IRA?” question, try not to think of it as an either/or situation. Rather, ask yourself if you should withdrawal money from any retirement accounts at all as you might have other options. Consider the following:

  • Stimulus payments are on the way.
  • Expanded unemployment benefits are available.

Get the latest details about this relief in our Coronavirus resource center.

Help for your 401(k) and IRA withdrawal questions

At H&R Block, we want you to feel confident as you make financial decisions, especially in these times of uncertainty. If you have questions about distributions from your retirement account, please know that H&R Block’s tax pros are here for you.

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