401k distribution under Cares Act

12 Replies

I found that I can take a full distribution on 401k under Cares Act if it’s taken by the end of 2020.

I know I would pay the tax on the capital gain, but can you share what your experience are if you’ve done this?

My belief in 401k doesn't perform any assets appreciation much as REI does.

Thank you for your time in advance.

@Jay Yoo

Your post is slightly confusing as you go from Cares act, to capital gains to appreciation.

I am not sure what you mean pay tax on capital gain.
If you have a capital asset within a non-retirement account, you report a gain if the property sold for a profit.
If you have a capital asset within a retirement account, you don't pay tax when it is sold. However, you pay tax on the distribution if it is a non-roth account.

Real estate can perform better than a 401K or a 401K can perform better than real estate. it really depends on what the person is individually investing in.
Also, it may be possible to hold real estate within a 401K. I just assume you mean more of a traditional 401K with stocks, bonds, mutual funds.

@Basit Siddiqi thank you. I thought getting cash out on 401k would be ended paying capital gain tax. Thank you for explaining to my newbie question!

@Jay Yoo if it's just a regular 401k, and you have it in normal stock/managed funds etc - the distribution should be taxed as regular income for you. NOT cap gains

this is unfortunate, as your income rate is going to be higher than long term cap gains obviously. Fed + state tax rate is what you'd pay. Typically, if you took it out early, you'd also pay an additional 10% penalty. This is the only thing waived via CARES act.

@Jay Yoo

I took out a 45k 401k loan for my real estate. I’m happy to spread out my portfolio with 50% in the stock market and 50% in real estate. That way if the stock market tanks for a couple years when I’m retired, I can survive 100% with passive real estate income and not take out anything from my 401k.

@Jay Yoo The cares act allows you to take up to 100k out of your 401k if you have been affected by covid without the 10% pre penalty.You still pay the 10 and 20% either at the distribution or on your next tax return.I was furloughed in March so I was affected and have taken out close to the limit.Capital gains will not affect this.There is also a hardship allowance but I didn’t deal with that aspect.

Best of Luck!

@Jay Yoo

@Ray Evans

1) A CARES Act Distribution is not subject to the 10% penalty that applies to early distributions (i.e. distributions taken before one turns 59.5).

2) A CARES Act distribution is still subject to income tax (not capital gains tax).

3) 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").

Originally posted by @John Morgan :

@Jay Yoo

I took out a 45k 401k loan for my real estate. I’m happy to spread out my portfolio with 50% in the stock market and 50% in real estate. That way if the stock market tanks for a couple years when I’m retired, I can survive 100% with passive real estate income and not take out anything from my 401k.

I would appreciate hearing more about how your REI has been with 50% of 45K. Did you buy a SFH and brrrr and cash out? Thank you bunch in advance.

 

Originally posted by @George Blower :

@Jay Yoo

@Ray Evans

1) A CARES Act Distribution is not subject to the 10% penalty that applies to early distributions (i.e. distributions taken before one turns 59.5).

2) A CARES Act distribution is still subject to income tax (not capital gains tax).

3) 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").

 Thank you so much for the details. In WA, there is no state tax on 401k distribution so I'm expecting just 10% Fed tax. I was on work-share for 3 weeks by my current employer. Would I be eligible for Cares Act distribution? The 401k provider has already processed and I'm receiving the fund in a day or two. Does that mean I don't have to pay back the penalty 10%?  Thank you, 

Originally posted by @Jay Yoo :
Originally posted by @John Morgan:

@Jay Yoo

I took out a 45k 401k loan for my real estate. I’m happy to spread out my portfolio with 50% in the stock market and 50% in real estate. That way if the stock market tanks for a couple years when I’m retired, I can survive 100% with passive real estate income and not take out anything from my 401k.

I would appreciate hearing more about how your REI has been with 50% of 45K. Did you buy a SFH and brrrr and cash out? Thank you bunch in advance.

When I say 50% of my investment portfolio, I mean half my investments are in the stock market and half in real estate (10 SFRs). And I was talking about being ok with taking out big 401k loans over the last five years to purchase real estate. I pulled out a loan from my 401k in 2015 to be able to pay cash for a rental. I sold it a year and a half later for a 40k profit and did a 1031 exchange with the $. No regrets on borrowing my 401k $ for that at all! Then two years ago I took out 45k from my 401k to use to pay cash for a beat up SFR I paid 50k for. I fixed it up and it's renting for $1,400/month. I'm clearing $1,150/month after expenses on it now. And my 401k five year loan paying myself back is $868/month. So I'm happy with that decision to borrow 401k money again. Then I recently took out another 45k loan for a major rehab on a SFR. I was able to increase the rent from $700/month to $1,200/month and basically guttered out the whole house so it should be maintenance free for 15-20 years. When my 401k loan on this is paid off, I'll be making $968/month after all expenses. So being 50% real estate and 50% stock market, I feel pretty well diversified in case things really go south when I'm retired. Most of my friends are 100% in the stock market. I don't want to be like that when the market tanks and I'm retired!

 

@John Yoo

1) On the surface your situation sounds viable but of course we have to stop short of providing tax advice and you would need to confirm with your tax advisor.  

2) The 20% withholding requirement and 10% early withdrawal penalties don't apply to a CARES Act Distrbution.

3) The amount of a CARES Act Distribution is still subject to income tax and will depend on your income tax rate and whether you elect to spread out the income tax over 3 years.

One thing worth remembering is that you can return money taken out of a 401k/IRA for three years with no tax penalty (i.e. it doesn't have the 60 day rule apply). So another aspect of this is creating options for yourself by having access to the money. You theoretically could pull the money out, re-invest it into the market using NON-retirement accounts, and put it back into your retirement account just shy of three years from now. The only tax risk would be if the market tanked in which case you were putting less back than you took out and would pay taxes on the difference.

Anyway, the point being that it's an easy way to give yourself access to capital that you might want sometime in the next three years. You can decide if a particular deal is worth the tax implications of using it for RE on a case by case basis.

(note I'm not a CPA, but I did do a lot of research on this)

One thing I think is not being talked about NEARLY enough is that, to *my understanding*, taxes ARE due on these funds, BUT *can be refunded* IF you return the money before 3 years and 1 day.

What this means is that say you take out 90K before the end of 2020. You would have the *option* to pay that tax in increments of 30K in 2020, 2021, 2022. So you might own say 6K in tax each year, and really only have 72K to work with.

Then when you finally DO 'put it back' before the 3 years and 1 day, you can file AMENDED returns to 'get back' those taxes you paid over those years.

So yes, it DOES work, but a bit more complicated than what some make it out to be.