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                                                                                         Updated March 27, 2020

Withdrawals and Loans from Retirement Accounts for COVID-

19 Expenses


The economic repercussions of COVID-19 could reduce
Americans' economic security; in response, individuals
may view their retirement accounts as a source of funds to
help meet current expenses. They may be able to withdraw
from their defined contribution (DC) retirement accounts
(such as 401(k) plans, 403(b) plans, and the Thrift Savings
Plan (TSP)) or from their traditional or Roth Individual
Retirement Accounts (IRAs). In addition, DC plans may
allow participants to borrow from their accounts.

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In general, withdrawals from DC plans are not allowed until
retirement. However, DC plans may allow individuals to
withdraw funds for a financial difficulty, referred to as a
hardship distribution. Withdrawals from traditional or Roth
IRAs are allowed for any reason.

Individuals who take a hardship distribution from a DC
plan or withdraw from an IRA (1) must include the taxable
portion of the distribution in that year's taxable income and
(2) may face a 10% penalty on the amount withdrawn. The
penalty is meant to discourage the use of retirement account
funds for preretirement purposes. The penalty does not
apply if the individual is aged 591/2 years or older, or if the
reason for the distribution is listed in 26 U.S.C. 72(t).
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Loans may be preferred to early withdrawals because (1)
proof of financial hardship is not required, and (2) amounts
borrowed are repaid to the individual's account. However,
in the case of a loan default (i.e., following job loss if the
borrower fails to repay the outstanding loan balance by the
deadline for that year's tax return), the loan balance must be
included in taxable income, and a 10% tax penalty applies.
Loans are not permitted from IRAs.



Provisions for hardship distributions under current law and
regulations include the following:

* DC plans may allow-but are not required to offer-
   hardship distributions.

* If DC plans allow hardship distributions, the plan
   document must specify which situations qualify as
   hardship.

* Individuals must demonstrate that they are experiencing
   immediate and heavy financial need to take a hardship
   distribution and that the amount withdrawn does not
   exceed the financial need.


* Certain distributions are deemed to be made on account
    of immediate and heavy financial need. The individual
    does not have to demonstrate financial need if the
    distribution is for one of seven specified situations (26
    C.F.R  1.401 (k)- 1 (d)(3)(B)).

 * Among other reasons, these deemed hardship
    distributions include

         *   tuition, fees, and other expenses for the next
             12 months of post-secondary education (this
             appears to exclude student loan repayments),

         *   certain medical expenses in excess of 7.5% of
             adjusted gross income that would be
             deductible under 26 U.S.C. 213(d),

         *   payments necessary to prevent eviction or
             foreclosure for a principal residence,

         *   burial and funeral expenses for an individual's
             parent, spouse, child, or dependent, and

         *   expenses and losses due to a disaster declared
             under the Robert T. Stafford Disaster Relief
             and Emergency Assistance Act (P.L. 93-288),
             provided that the employee's principal
             residence or principal place of employment at
             the time of the disaster was located in an area
             designated by FEMA [the Federal Emergency
             Management Agency] for individual
             assistance with respect to the disaster.

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 It is unclear whether distributions for COVID- 19 related
 expenses would be allowed under the hardship distribution
 regulation for disaster assistance. The regulation specifies
 that hardship distributions are allowed for employees in an
 area designated for individual assistance as a result of a
 FEMA disaster declaration. In response to COVID-19,
 President Trump issued an emergency declaration under the
 Stafford Act. In addition, FEMA indicated that the
 declaration does not make direct financial assistance
 available to individuals. A number of states have received
 disaster declarations, although it is unclear if individual
 assistance has been approved for these states. For more
 information on the emergency declaration issued by
 President Trump in response to COVID- 19, see CRS
 Insight INI 1251, The Stafford Act Emergency Declaration
for COVID-19.


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