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Pulling From Your 401(k) During The Pandemic

The 2020 COVID-19 pandemic has brought many hardships with it, including an economic fallout. As a result, and with the help of the CARES Act, many Americans have turned to their retirement savings to help them stay afloat. 

If you happen to be one of those who dipped into your retirement savings to make a coronavirus-related distribution, here’s what repaying it looks like.


The Coronavirus Aid, Relief, and Economic Security (CARES) Act is a $2 trillion economic relief bill created in response to the economic crisis brought on by the COVID-19 pandemic. 

Under this act, individuals who faced economic hardship resulting from the pandemic could withdraw up to $100,000 from their retirement savings accounts, including 401(k) plans, without penalty.

Repaying In Full

One of the benefits of the CARES Act is that the 10% penalty for early distributions was waived. This doesn’t mean you’re off scot-free, however. If you did make a coronavirus-related distribution during 2020, then you have a few options when it comes to how you plan to repay your withdrawal.

The first option is to fully or partially repay your distribution, as long as you repay it within three years of receiving your distribution. If you repay your distribution in full, you won’t owe federal income tax on it. 

Although repaying your distribution is not required, it can be the better option. The sooner you can put that money back into your account, the sooner it can begin to invest and earn a return.

Paying Taxes

On the other hand, if repaying your distribution in full doesn’t seem like a feasible option, you have the other option to pay taxes on it over the next three years. If you choose to go this route, then you would report your distribution as part of your income on your federal tax returns over the next three years. 

Alternatively, you can include your entire distribution in your income for this year and be done with it. When it comes to choosing to pay taxes all at once or to defer it over a three year period, you may want to consider your current tax bracket to determine how much you might potentially pay in taxes.

How you decide to pay back your coronavirus-related savings distribution is completely up to you, however, you do want to make sure you evaluate all your options and choose the option that best fits your financial situation. What’s most important to remember is to always cut back on other expenses first, and try to avoid dipping into your retirement until it’s your last option. 

Photo by Christina Morillo from Pexels.