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Care Act 401k hardship withdrawal
Old 09-24-2020, 12:29 PM   #1
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Care Act 401k hardship withdrawal

Ok, I was originally planning to retire early late next year utilizing a a 5 year SEPP plan withdrawal until I would hit closer to 59.5/Rental income and my SS at 62.

The SEPP was needed basically as a (5) year bridge, however the mid-term rate which benchmarks and establishes the SEPP payments has dropped to 0.46 and will not provide enough for funding for my original plan...It is also not expected to normalize until possibly 2023.

Currently I do qualify for the Cares Act 401k program, and it seems to be a good option for me, with the only caveat being, that the withdrawal or portion of the withdrawal would be taxed at the higher rate I'm currently in vs the expected tax rate when I retire in the future.

My plan is to spread and phase out the tax hit over the 3 years allowed and not take it all in 2021...

Other than tax hit, is there any other consideration that makes this a bad idea vs the original SEPP plan?...I do plan to invest what I take out, so I should not lose much momentum regarding ROI. It seems this would give me more access to funds and flexibility in the future coming from my bank and not as a future disbursement.

Thoughts?
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Old 09-24-2020, 12:57 PM   #2
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... Currently I do qualify for the Cares Act 401k program, and it seems to be a good option for me, with the only caveat being, that the withdrawal or portion of the withdrawal would be taxed at the higher rate I'm currently in vs the expected tax rate when I retire in the future.

My plan is to spread and phase out the tax hit over the 3 years allowed and not take it all in 2021...
I don't think taking it all (for tax purposes) in 2021 is even an option. You have to withdraw the money in 2020, and if you spread the taxes over 3 years, you would be paying the higher tax rates in the 2020 and 2021 tax years while you're employed.

I do question whether the $100K limit is enough to make the difference in your retirement plans. If you're so close to the line that $100K makes the difference as to whether you can retire or not, are you really ready?
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Old 09-24-2020, 01:18 PM   #3
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Thanks Cathy...Yes taking the tax hit all in 2020 or 2021 is not the option... I will attempt to take as much as I can in 2022 and still stay in the 12% tax rate.

The 100k does matter for me over a 5 year period, as I live on a boat and have very reasonable expenditures. I'm only planning to take about 80k to supplement my existing savings for (5) years until one of my rental houses pays off in 2025.

It really comes down to bridging years to when future earnings come, so I'm still able retire early.

The 401k withdrawal option just seems tgtbt to be honest.

Thanks!
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Old 09-24-2020, 01:30 PM   #4
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Thanks Cathy...Yes taking the tax hit all in 2020 or 2021 is not the option...
Actually, you can take the entire tax hit in 2020, or you can divvy in to 1/3's over 2020, 2021 and 2022. You can also do either of these, and then pay it all back to a qualified rollover account by the end of 2022 and file amended to get the taxes back. The benefit is no 10% penalty if under 59.5, or not entitled to the Rule of 55.
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Old 09-24-2020, 02:46 PM   #5
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Thanks Cathy...Yes taking the tax hit all in 2020 or 2021 is not the option... I will attempt to take as much as I can in 2022 and still stay in the 12% tax rate.
Emphasis added.

Note that in order for a distribution to qualify as a penalty-free coronavirus withdrawal under the CARES Act, the withdrawal must be made in 2020. A withdrawal made in 2022 appears to me that it would not qualify.

See CARES Act, Section 2202(a)(4)(A)(i).
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Old 09-24-2020, 03:32 PM   #6
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The early withdrawal penalty is only 10%. That + the lower tax rate when you decide to withdraw (in a lower marginal tax year in the near future). If those two add up to less than your 2020 marginal tax rate, you may do better to take the penalty. You will have more flexibility on when to do the withdrawal and how much also.
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Old 09-24-2020, 05:13 PM   #7
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Is 401k loan an option?
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Old 09-24-2020, 08:08 PM   #8
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One thing to be aware of is how your plan sequences withdrawals. For a COVID-19 withdrawal from my plan; the "after tax" and Roth portions are taken out first and THEN the pre-tax. ( I have Roth and after tax contributions in the 401K)

I effectively would only have about $60,000 taxable.

To take full advantage of the 1/3 tax incentive I would need to withdraw the Roth and after tax before I took the COVID-19 withdrawal otherwise reduced tax incentive!
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