Thoughts on using CARES Act 401k withdrawal for rental purchase?

Question

I tested positive for COVID a few weeks ago.  Thankfully had a mild case.

I was reading that if you test positive, you qualify to take up to $100k out of your 401k without the 10% penalty.  If you pay back within 3 years you can avoid paying those taxes or get those taxes back in credits (I’m not clear on how that works out yet)

My thought is to use the money to jump start my invest by using a BRRR strategy and be able to pay back the $100k by year 3.

I know this can be risky depending on what happens in the markets.

Anybody else considered doing this?

George Blower · Answer

1) One of the ways to qualify is to test positive for COVID using an approved test.

2)  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.Note: It is too late to take a loan under the CARES Act.

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that the account into which the funds are deposited must be the same type of account from which the funds were first withdrawn (e.g. withdrawal of pre-tax funds from a 401k could be deposited in a pre-tax IRA but not a Roth IRA - "like to like").

Mark H. Porter · Answer

Hi John - this has nothing to do with catching the virus.  You had to be impacted, financially, by it.

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