IRS Expands Eligibility of Special Rules for 401(k) Withdrawals & Loans

In this new world of COVID-19, many things are changing at a lightening pace. Most recently is updated guidance from the IRS regarding retirement accounts for people affected by COVID-19:

 401(k) Withdrawals

Old Rule: 401k (and IRA) withdrawals before age 59 ½ resulted in a 10% federal penalty; 20% income tax withholding was mandatory; all income taxes due on 2020 income tax return.

New Rule: 401k withdrawals of up to $100,000 for COVID-related expenses are not subject to the 10% penalty; not subject to mandatory withholding; spread the income tax liability over 2020, 2021 and 2022 income tax years; and if repaid within three years, you can claim a refund on those taxes.

401(k) Loans

 Old Rule: You could borrow $50,000 or 50% of your vested balance, whichever was less with repayment in installments not to exceed 5 years.

New Rule: You can borrow up to $100,000 or 100% of your vested balance, whichever is less and delay payments on the loan for one year.

Expanded Eligibility

 Old Guidance: You, your spouse or dependent were diagnosed with COVID-19.

New Guidance (June 19): Expanded to include:

  • Laid-off, furloughed, quarantined, reduction of hours.
  • Closing of business or reduction of operating hours due to COVID.
  • Unable to work due to unavailability of childcare.
  • Job offer rescinded or delayed or income reduced.


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COVID-19 Update- Expanded Eligibility for 401-k Benefits

CARES Act provided special rules for 401-k withdrawals/loans if you, spouse or dependent infected with COVID-19

On June 19, IRA expanded eligibility (if due to COVID) if you, spouse or dependent:

  • Laid-off, furloughed, quarantined, reduction of hours.
  • Closing of business or reduction of operating hours.
  • Unable to work due to unavailability of childcare.
  • Job offer rescinded, delayed or income (offer) reduced.


Brief explanation of new rules for 401(k) withdrawals/loans

401-k Withdrawals:

  • 10% federal early-withdrawal penalty waived on $100,000
  • Income taxes spread over 3 years
  • Can re-pay the loan within 3 years for tax refund

401-k Loans:

  • Borrow the lesser of up to $100k or 100% of vested balance
  • Delay loan payments for 1 year




Stewart H. Welch, III, CFP, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only investment management and financial advice to families throughout the United States. He is the author or co-author of six books, including  J.K. Lasser’s New Rules for Estate, Retirement and Tax Planning- 6th Edition (John Wiley & Sons, Inc.); THINK Like a Self-Made Millionaireand 100 Tips for Creating a Champagne Retirement on a Shoestring Budget. Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by The Welch Group, LLC (“Welch”), or any non-investment related content, made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. More information about The Welch Group and important Disclosures can be found on our website. Consult your financial advisor before acting on comments in this article.