Can Relaxed Retirement Plan Withdrawal Rules Help Settle Your Divorce?

Posted on May 27, 2020 by Lisa Sharpe

The new CARES Act has relaxed retirement account withdrawal rules for some retirement plans due to COVID-19 related reasons. These relaxed withdrawal rules apply to IRA, 401(k), and other “eligible retirement plans” as defined by the CARES Act. COVID-19 has disrupted life for all of us, with tens of millions of Americans losing jobs because of the pandemic. For those getting divorced, the financial instability that often accompanies a divorce is only heightened by COVID-19.

If you are in the process of getting divorced, or are one of the tens of millions of Americans losing their jobs due to the virus, then there is a new option to help pay the bills: withdrawing money from your eligible retirement plan. Typically, if someone withdrawals money from a 401(k), IRA, or other qualified retirement plan before the age of 59.5, they are subject to a 10% penalty and income tax, but the new CARES act allows access to eligible retirement plans as follows:

  • Withdrawals of up to $100,000 without 10% penalty.
  • Borrowing 100% of your 401(k) or IRA balance (up to $100,000) instead of 50%.
  • The income tax, if applicable, can be paid over the next three years instead of up front.

If you are considering making a withdrawal, you should first attempt to take advantage of other opportunities, including receiving a stimulus check, unemployment benefits, and canceling bills if possible. If you have taken these steps and you are still unable to pay the bills or are struggling with a financial settlement in divorce, then eligible retirement plan funds are available.  The downside of taking out retirement plan funds is the cost of dipping into retirement savings that are set aside for your future. The money in your retirement savings would have earned interest in the future. That retirement plan money is especially valuable now, at the start of a recession, as stocks have decreased in value due to the coronavirus epidemic, making withdrawals even more costly. Taking money out of your retirement plan may mean a later retirement date, and/or more aggressive saving.  Because of that, it should be a last resort option. However, a lot of Americans are at their last resort, especially those going through a divorce.  The trade-off could be worth it if you need to access case to support yourself or an ex-spouse during this pandemic.