CARES Act 401k distribution to fund REI?

7 Replies

Has anyone used the new CARES act guidelines for 401k withdrawal? It's my understanding if you qualify, the money withdrawn counts as taxable income but can be paid over the next 3 tax years and no 10% early withdrawal fee prior to age 59.5. Pros/cons of this to fund real estate investing?

An alternative to "withdrawals" would be to take out a loan on your 401k. If your 401k allow loans, the CARES Act increased 401k loan limits to up to $100,000 or 100% of a participant's account balance that is vested, whichever is lower. So you can take out a 100k loan and purchase a property cash with no mortgage required. Now instead of paying interest to a bank with a mortgage, you pay interest to yourself on the 401k loan - adding to your retirement. The key thing to consider is the loan payment amount. The shorter 401k loan term will likely result in a higher payment. After you close, you can always do a refi cash out to pay back your 401k loan and get into a more traditional loan payment structure. The advantage in this scenario is about being able to come in as a "cash buyer" and not require financing to close a deal. Just an option for you to consider.

@Blake Rumley

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that the account into which the funds are deposited must be the same type of account from which the funds were first withdrawn (e.g. withdrawal of pre-tax funds from a 401k could be deposited in a pre-tax IRA but not a Roth IRA - "like to like").

Originally posted by @George Blower :

@Blake Rumley

    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").

 @George Blower

So Federal withholding is 20% flat? Or that is 20% default, then it varies from person to person?

Thanks.

@George Blower

Thanks so much for the response.  The company I worked for said they waived the 10% of the 20% so that's why I asked.  Need to get back to them to confirm if only 10% or entire 20% is waived.