Should I take loan or distribution from my retirement plan as a source of funds?

Should I take loan or distribution from my retirement plan as a source of funds?


Given the times we live in, there is no easy answer to this question. If you need the funds you’re your retirement plan for your required living expenses, and do not have additional non-debt related resources available, then you may be a candidate for either a loan or distribution from your retirement plan. Since there may not be a simple “one size fits all” solution to this question, it’s important to at least have good information upon which to base your decision. Consider first what we know about the retirement plan loan and distribution provisions of the CARES Act.


Loans from employer provided retirement plans under the CARES Act

  • Loans from qualified plans (not IRAs) - of up to $100,000 are allowed, and repayment can be delayed. The new bill doubles the current $50,000 limit on loans from your 401(k) and other similar plans to the lower of $100,000 or 100% of your balance, for those affected by the Coronavirus. If you have an existing loan, you will be permitted to delay any repayments due in 2020 to next year. Remember, loans are tax-free unless you fail to repay. At which point a 10% penalty is due for those under 59.5 years of age.
  • Distributions from retirement plans or IRAs under the CARES Act
  • Distributions of up to $100,000 (in aggregate) can be taken under certain circumstances without the 10% early distribution penalty and can be repaid within three years.
  • For those who have suffered a loss of income due to the virus, the CARES Act will allow savers to withdraw funds from their employer sponsored plans and IRA accounts, up to $100,000 during 2020, and avoid the normal 10% penalty for those not of the required minimum age of 59½. The Act also suspends the mandatory 20% tax withholding that is normally applied to early distributions from employer provided retirement plans. One is still required to pay income taxes, but they will be allowed to spread that tax due over three years. Another option is to rollover the withdrawn amounts back into the retirement account (not necessarily the same product) during the three-year grace period (check if the product permits repayments). To qualify for these provisions, individuals need to fall into one of two main categories:
    • You, your spouse or a dependent is diagnosed with COVID-19
    • One could experience 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 or closures related to the coronavirus pandemic.


Other considerations

Before you dip into your retirement savings, consider all other resources available to you, their costs (if any), and how long you think you might be affected by the current situation. Again, your decision is highly personal and should not be made in haste. The following some other factors as well that might affect you.

  • Your retirement goal has not gone away – Sooner or later, this goal will have to be addressed. If you do reduce your plan balance either by a loan or distribution, it’s important to readjust your retirement projections base on your plans to manage the loan or distribution.
  • Employer plan requirements – It’s important to check whether your employer’s plan will even allow for loans or distributions.
  • Locked in losses - Funds taken out of your retirement plan via a loan or distribution may not be there if/when the market recovers.
  • Your tax situation – Your personal tax situation may affect whether you take a loan, distribution, or other method to cover essential expenses.
  • State taxes – Although the CARES Act has may ease many federal tax provisions, you should consider any state taxes that might affect your decision.

Next steps

  • Look before you leap – consider all options as mentioned above and have a plan.
  • Talk with your employer – to determine what options you might have.
  • Involve professional guidance – from qualified tax, legal, or finance counsel to help determine which course of action might be best for you.



USAA believes the websites and resources used to gather this information are reliable; however, we cannot guarantee the accuracy or timeliness of the information.


The contents of this document are not intended to be, and are not, legal or tax advice. The applicable tax law is complex, the penalties for non-compliance are severe, and the applicable tax law of your state may differ from federal tax law. Therefore, you should consult your tax and legal advisers regarding your specific situation. USAA or its affiliates do not provide tax advice. Taxpayers should seek advice based upon their own particular circumstances from an independent tax advisor.



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