What to Know About the CARES Act COVID Withdrawal For Retirement

The CARES Act allowed eligible plan participants to take early distributions from their retirement accounts and to take larger loans from their 401(k) plans.

Written by Erin Gobler / July 14, 2022

Quick Bites

  • The CARES Act was a federal relief bill passed in response to the COVID-19 pandemic to reduce financial hardship on American families.
  • Eligible plan participants could take early distributions from their retirement plans without being subject to normal penalties.
  • The CARES Act also allowed 401(k) plan participants to take larger loans from their plans if their employers allowed it.

When the COVID-19 pandemic hit in early 2020, millions of jobs were lost and many people felt the financial impact deeply and immediately. The federal government took quick action to provide relief for American families, including making it easier to access the money in retirement accounts without being subject to the usual penalties. The special withdrawal rules were temporary and have since expired, but there are still options available to those facing financial hardship.

Inside this article

  1. About the CARES Act
  2. Withdrawal rules
  3. Tax implications
  4. How to qualify
  5. What to do if you’re struggling
  6. FAQ

About the CARES Act

The CARES Act—short for Coronavirus Aid, Relief, and Economic Security—is a piece of legislation Congress passed at the start of the COVID-19 pandemic to provide financial relief to American families as the world shut down and businesses with them, resulting in millions of jobs lost.[1]

The bill included major benefits for individuals, including direct recovery payments, an expansion of unemployment benefits, a pause on student loan payments and interest, forgivable business loans and more.[2]

What are the CARES Act COVID withdrawal rules?

Among its many benefits, the CARES Act loosened retirement account withdrawal rules to make it easier for people to take money from these accounts.

Penalty-free withdrawals

Under normal circumstances, you’re prohibited from taking distributions from your tax-advantaged retirement accounts before age 59½, and distributions before then would be subject to a 10% early withdrawal penalty.[3] But during the pandemic, this rule was lifted for certain people.

“Anyone directly affected by the disease itself or who faced economic hardship because of the pandemic could take what was called a coronavirus-related distribution (or CRD),” says Carl Holubowich, a Certified Financial Planner at Armstrong, Fleming & Moore, Inc, a financial planning company.

This CARES Act provision allowed for distributions up to $100,000 from any eligible retirement plan, including:

  • 401(k)s

  • 403(b)s

  • IRAs

  • SEP IRAs


  • Profit-sharing plans

  • Pension plans

  • 457(b)s[4]

Increased 401(k) loans

In addition to making it easier to take an early distribution from your retirement plan, the CARES Act also altered the rules for 401(k) loans taken between March 27, 2020 and September 23, 2022.

Under normal circumstances, plan participants can take a 401(k) loan—if permitted by their employers—of up to 40% of their vested account balance or $50,000, whichever is lower. The loan has to be repaid within five years.[3]

The CARES Act increased the amount plan participants could borrow from $50,000 to $100,000 and from 50% of their vested account balance to 100% of their vested account balance.[4]

Note: It is at the discretion of employers whether to allow 401(k) loans under normal circumstances. These special 401(k) loans were only available to employees of companies that allowed for loans.

Tax implications of a CARES Act COVID withdrawal

First, and most importantly, for many plan participants, there was no 10% early withdrawal penalty charged on distributions allowed under the CARES Act.

Of course, that doesn't mean distributions were subject to no taxes. The money contributed to these plans is often pre-tax, meaning participants must pay income taxes on their withdrawals.

“Any distribution from an IRA or retirement account would still count as taxable income,” Holubowich says.

That being said, there were still some favorable changes to the tax treatment of COVID-related distributions. First, the tax liability on these withdrawals could either be taken in the year the money was taken out or spread out over three years. For example, if you took $90,000 in distributions from your 401(k) under the CARES Act, you could claim $30,000 per year on your income tax return for three years, spreading out the amount you would owe in taxes.

Plan participants weren’t required to repay the distributions but could choose to do so within three years. If they repaid the loan, they wouldn’t have to pay any income taxes on the amount they took out.[4]

Qualifying for a CARES Act COVID withdrawal

Not just anyone could take a CARES Act withdrawal from their retirement plan. To be eligible for this benefit, you had to meet the following requirements:

  • Be diagnosed with COVID-19

  • Experience adverse financial consequences due to the following happening to you or your spouse:

  • Being quarantined, furloughed, or laid off

  • Having work hours reduced

  • Being unable to work due to a lack of childcare

  • Having a reduction in pay

  • Having a job offer rescinded or a start date delayed

  • Closing or reducing hours of a business you own or operate[4]

What to do if you’re struggling today

“All COVID withdrawal rules expired in 2020 since they were meant to be temporary aid for individuals during the pandemic,” Holubowich says.

The good news is that there are still plenty of opportunities available for families struggling financially.

“If you are still struggling to make ends meet, there continues to be billions of dollars in federal rental assistance accessible to tenants who have fallen behind,” Holubowich says. “A tool from the Consumer Financial Protection Bureau can help you apply for programs in your area.”

Many of the aid dollars available are the result of programs created during the pandemic, but there are also plenty of types of aid that were available pre-pandemic that continue to be an option today.

“There are also government programs to help people in need such as the Supplemental Nutrition Assistance Program which provides foods to low-income families and the Low Income Home Energy Assistance Program that helps with heating and cooling bills,” Holubowich says.

Finally, while the COVID retirement withdrawal rules may no longer be an option, it is still possible to take money from your 401(k) before retirement to help you through a difficult time. There are hardship distributions available to help with “an immediate and heavy need.” 401(k) plan participants can borrow up to 50% of their vested account balance, or up to $50,000, whichever is less.[3]


What are the special rules for retirement plans and IRAs in section 2202 of the CARES Act?

Section 2202 of the CARES Act allowed for early distributions from retirement plans for up to $100,000 without being subject to the 10% early withdrawal penalty.

Do I have to pay the 10% additional tax on a coronavirus distribution from my retirement plan?

As long as you met one of the requirements to be eligible for a COVID-related distribution, you wouldn’t have had to pay the 10% early withdrawal penalty.

What other benefits were available under the CARES Act?

Other benefits available under the CARES Act included direct impact payments, expanded unemployment benefits and a pause on student loan interest and payments.

When did the CARES Act retirement withdrawal rules expire?

While many of the CARES Act financial protections were extended beyond their original deadline, the retirement withdrawal rules expired at the end of 2020.

Article Sources
  1. “About the CARES Act and the Consolidated Appropriations Act.” U.S. Department of the Treasury. https://home.treasury.gov/policy-issues/coronavirus/about-the-cares-act.
  2. “What’s Inside the Senate’s $2 Trillion Coronavirus Aid Package?” NPR. March 26, 2020. https://www.npr.org/2020/03/26/821457551/whats-inside-the-senate-s-2-trillion-coronavirus-aid-package.
  3. “401(k) Resource Guide - Plan Participants - General Distribution Rules.” IRS. https://www.irs.gov/retirement-plans/plan-participant-employee/401k-resource-guide-plan-participants-general-distribution-rules.
  4. “Coronavirus Relief for Retirement Plans and IRAs.” IRS. https://www.irs.gov/newsroom/coronavirus-relief-for-retirement-plans-and-iras.

About the Author

Erin Gobler

Erin Gobler

Erin is a personal finance expert and journalist who has been writing online for nearly a decade. Erin’s work has appeared in major financial publications, including Fox Business, Time, Credit Karma, and more.

Full bio

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