Using CARES Act to withdraw from my 401k to Invest

[Gary David]

I am new here and would like to get some input on this matter. Please don't post any comments on how taking money out of my 401k is going  ruin my future savings and compounding …blah blah...I have enough in there that 100k wont hurt me and this post is not about that.

 I have done all the research on this and I am able to withdraw up to 100k from my 401k without the 10% penalty via the CARES act as long as it is before 12/31/20  The LOAN program expired 0n 9/23 so I am considering a straight withdraw. Yes I know you have to pay taxes on it since it is in a tax deferred account but with the cares act it can be spread across the next three years. So I will get taxed on $33,333.33 for 2020,2021,2022 and I am ok with that too. So here is where I struggle. Taxes ARE going to go up there is no doubt due to all the feds printing and giving out money they have to pay for it somehow. So do you pay it all up front in 2020 or spread it? If I buy a property in 2020 start up a new LLC is there time left in the year to write off and deprecation to offset the tax if taken all the tax hit in 2020. Also when you withdraw it you have 3 options for taxes 0 with-held 10% with-held or some number over 10% but you have to choose when you withdraw. One last thing if you pay back the 401k within three years of the date of the withdraw you can then file for a refund of the taxes you paid via a amended return. Overall in my opinion it is a good way to get some cash to get started buying real estate. Thanks in advanced for your input and feedback.

[Dmitriy Fomichenko]

@Gary David

I agree with you that generally the taxes are going to go up in the future. But it would be a speculation trying to predict what YOUR taxes will be two and three years from now. The bottom line is this: you can pay all the taxes in the first year, or you can spread it out over 3 years. Prudent thing to do would probably be to get together with your CPA and discuss which option would be the best for you. 

[Basit Siddiqi]

@Gary David

Taking a distribution from your 401K can be great as you may not be responsible for the 10% penalty.

If you plan to work a reduced workload, go back to school, or do many other things that lower your bracket, you may benefit from spreading the tax over 3 years.

The thing that does suck about the distribution is that it is basically taxed at your marginal tax rate(Federal and State) depending on what your bracket is, it can be a lot.

Regarding withholding - it is most likely the 0% or 10% option will likely make you pay a tax when you file your return in the following year.

[Michael Lazzaro]

To take advantage of the CARES act you need to have been affected by COVID 19. Your 401k company will make you sign a form stating such. You are able to pull from the 401K piggy bank as many times as you want in 2020 unless its gotten extended, up to $100k or whatever you have vested. I used this to buy my second property since I already have a 401k loan out. I think in a strong market the 401k loan is better, but right now I would take the money and run. And just try and pay it back within the next 3 years. Seems like a good hack for your money if you think your real estate investment will do better than your 401k.

[George Blower]

@Gary David

Keep in mind that in order to take a distribution under the CARES Act you must have been impacted by the virus in one of the enumerated ways & your current account provider must allow you to take a CARES Act distribution. The IRS recently provided guidance regarding eligibility under the CARES Act and specified that a qualified individual includes an individual who has a reduction in pay (or self-employment income) due to COVID-19.

Distributions:

If so, 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 anIRA) 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").

[Ivan Vasquez]

@Michael Lazzaro

Hi. I’m interested to hear more about how you did this? I want to do this before this year ends.