Covid19 Care Act

Submitted by Richard Ernst on Mon, 2020-04-13 23:54

Client of ours ( they will both turn 59 1/2 in July ) just moved to Colorado. They are looking to purchase a $ 400,000.00 home. Their combined income is $ 85,000.00. They have very little saved in the bank and just $ 200,000.00 in a 401(k) ( $ 50,000.00 of which is made up of Roth assets ). They are looking to withdraw $ 95,000.00 from the 401(k) to cover the 20% down-payment & closing costs.

Our recommendation was to keep renting thinking that they just can not afford this acquisition.
The Third Party Administrator recommended that they apply for a hardship withdrawal ( we are not sure what the hardship is ), avoiding the 10% penalty & that they ( the TPA ) would be withholding 20% ( $ 19,000.00 ) even if $ 50,000.00 came from the Roth.

We have spent months recommending against this purchase. We are looking for a second opinion. Are we missing something? Should the TPA be withholding the 20% from the $50,000.00 coming from the Roth? What about waiting until July?

Thanks, as always, for your thoughts.



Submitted by Alan - IRA critic on Tue, 2020-04-14 02:46

  • I agree with you 100%. This is a very bad idea, even if they have great job security and plan to work until 70. Even worse during the great pandemic of 2020. The plan(s?) will have specific guidelines for hardship distributions, but the IRS has determined that purchase of a principal residence qualifies as a hardship. If the plan offers loans, they must use the loan proceeds first.
  • In the event they qualify for a corona virus distribution (CVD), that is much broader than a hardship distribution and avoids the penalty. In addition the taxes can be paid over 3 years. But they must qualify and the final IRS Regs have not yet been written.
  • Hardship distributions are not subject to mandatory withholding because they are not eligible rollover distributions. The employee can elect an optional amount.

Submitted by Herm Brames on Wed, 2020-04-15 03:31

Alan, your second bullet on this response is certanly correct in that final Regs. have not been written yet however in an earlier response to a question I posted on this site you indicated that for a married couple, one of the spouses would have to have  the CV, or so certify in order to benefit from a CVD.  Unless that is expected to change, an advisor might want to factor that consideraton into their advice.  Is that corect?

Submitted by David Mertz on Tue, 2020-04-14 03:51

  • The early-distribution penalty on taxable amounts distributed from the 401(k) would be avoided only if the participant waits until after reaching age 59½ to obtain the distribution.  A hardship distribution implies a distribution before reaching age 59½ and “hardship” is not an exception the early-distribution penalty.
  • With regard to a distribution that is not a hardship distribution, 20% withholding on a distribution from a 401(k) only required on the taxable portion of the distribution (the amount that will be in box 2a of the Form 1099-R).

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