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The CARES Act, Your Retirement Savings and Bankruptcy: What You Need to Know

Early in July, estimates of the number of unemployed Americans, ranged from 18 million to 33 million depending on what figures were examined.1 Regardless of which number you choose, it’s clear that a lot of American families are suffering economically due to the pandemic. Even more concerning is that the financial situation of many Americans is projected to worsen at the end of July as the $600 extra per week in unemployment payments authorized as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act will end.

There is little hope that that $600 will be renewed if another round of stimulus aid is approved. If you are struggling to pay bills and have retirement savings the CARES Act also had provisions to ease the burden of early withdrawals and loans, but it is important to fully understand the drawbacks in terms of your future financial security, including implications if you ultimately have to file for bankruptcy protection.

Retirement savings have been hard to access in the past in order to make it difficult for savers to get money that was intended to be used in the later years of their lives. The CARES Act removed many of the barriers to accessing retirement savings.

Prior to the Act, if you were under 59.5 years of age and wanted to withdraw funds from your 401(k) or 403(b) workplace retirement plan the government would automatically withhold, as income tax, 20 percent of the money you withdrew. They would also impose a 10 percent penalty for early withdrawal. The CARES Act eliminated the 10 percent early withdrawal penalty and the automatic 20 percent withholding. You will still have to claim the withdrawal as income but instead of paying the taxes on the whole amount in the year it is withdrawn, the tax burden can be spread over three years.2

To take advantage of the CARES Act provisions you must be impacted by COVID-19 in one of several ways. For example, if you, your spouse or a dependent has been diagnosed with the coronavirus; if you’ve experienced adverse financial consequences because of being quarantined, furloughed, laid off or because you’ve had your work hours reduced; you can’t work because of lack of child care; or you had to close or reduce the hours of your business as a result of the virus. The qualifications list, and any updates, are available on the Internal Revenue Service (IRS) website.3

The CARES Act also makes it possible, if your retirement plan permits it, to withdraw or get a loan from your retirement savings of as much as $100,000. In the past you could only borrow or withdraw up to 50 percent of your vested account balance or $50,000, whichever was less. If you have a current loan on your retirement savings, repayment of the loan may be delayed under the CARES Act if your employer’s plan allows it for up to one year, however, payments will later be adjusted to reflect the delay and any interest accrued during the delay.

Before you take a withdrawal or loan from your retirement savings to pay off your creditors or buy needed items, it’s important to have a general understanding of what will happen in the event that you have to file for bankruptcy protection. Retirement accounts that are qualified under the Employee Retirement Income Security Act (ERISA) are generally protected from your creditors during bankruptcy, but items you bought with retirement plan loans or withdrawals, prior to filing for bankruptcy protection, are not protected.4

The bottom line is that bankruptcy is a complicated situation based on an individual’s situation. It’s a wise move to consult with a bankruptcy attorney prior to taking a loan or distribution from a retirement account when you believe that your financial situation is such that you may have to file for bankruptcy at some point in the near future. If you file for bankruptcy your qualified ERISA retirement money can be protected for your use in retirement.

If you are overwhelmed with debt and losing control of your finances, personal bankruptcy may be an option for you. Hines Law is a full-service bankruptcy firm specializing in Chapter 7 and Chapter 13 filings. With 20 years’ experience and knowledge, the bankruptcy lawyers at our firm will guide you every step of the way no matter what specific issues you may be facing. Call us today for a Free Case Evaluation!

1 Jobless Claims Tell Us 33 Million People Are Unemployed, but Many Doubt it’s That Bad, by Jeffry Bartash, 7/9/2020
Link: https://www.marketwatch.com/story/jobless-claims-tell-us-30-million-people-are-unemployed-but-many-doubt-its-that-bad-2020-07-08

2 CARES Act Liberalizes 401(k) Withdrawals, www.forbes.com, by Frank Armstrong III, 4/20/2020
Link: https://www.forbes.com/sites/frankarmstrong/2020/04/20/cares-act-liberalizes-401k-withdrawals/#275c9eb3691c
3 Coronavirus-related relief for retirement plans and IRAs questions and answers
Link: https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers

4 Is My 401k Account Exempt or at Risk in Bankruptcy? www.alllaw.com, by Cara O’Neill
Link: https://www.alllaw.com/articles/nolo/bankruptcy/401k-account-exempt.html