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CARES allowing 401 K withdrawal without paying penalty
Old 04-18-2020, 02:47 PM   #1
Confused about dryer sheets
 
Join Date: Apr 2020
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CARES allowing 401 K withdrawal without paying penalty

I want to take advantage of new rule and take out certain amount from my 401 k and use it to decrease my mortgage principal so I can re-finance to get lower interest rate and change mortgage from 30 to 15 yrs. Without paying off certain portion of the principal, monthly payment won't be as manageable as they are now, and I don't have any other funds to use. Changing mortgage from 30 to 15 years saves approx. 100,000 $ in interest over 30 years of the mortgage. Not to mention that bigger portion of your monthly payments is going towards your principal.
Currently my 401 K is mostly in cash funds and gives 1% return. I am not comfortable moving it back to stock market any time soon.

Also, I have "rainy day" fund that I want to keep for now but might use to repay the 401 K withdrawal when the economical situation becomes more stable.

My lender quoted me 2.875% for 15 yrs mortgage vs. 3.875% that I am paying for 30 yrs currently.

Any pitfalls I haven't thought of? Anyone has already used their 401 k in this way?
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Old 04-18-2020, 03:15 PM   #2
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You’ll need to determine if you qualify for the 401K distribution first

https://www.irahelp.com/slottreport/...and-plan-loans
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Old 04-18-2020, 03:31 PM   #3
Confused about dryer sheets
 
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You may be eligible for this distribution if you, your spouse, or dependent have been diagnosed with COVID−19, or you have experienced adverse financial consequences related to COVID−19, lack of childcare, etc.....Reasons are multiple.
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Old 04-18-2020, 03:58 PM   #4
Confused about dryer sheets
 
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"being unable to work due to lack of child care" seems to be open to interpretation.
As a single parent my productivity definitely went down.
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Old 04-18-2020, 04:01 PM   #5
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Have you checked mortgage interest rates lately at your lender's? Last time I checked, my interest rate would be higher. We're at 3.75% - if I chose to re-finance it was going to be over 4%. Banks are tightening up their lending standards.

To lower your overall interest payments, you could just switch to 13 payments a year, or some accelerated repayment schedule that would be more equivalent to a 15-year schedule. Just one extra payment can make a big difference. This would also give you more flexibility if you need to lower payments at any time.

It's interesting to plug scenarios into a mortgage calculator to see how different possible payment strategies would impact your loan amortization. Cash is king right now, and I would hang onto as much of it as I can. It may be harder to gain the leverage back later. You still will have to pay taxes on the 401K withdrawal. See how it kicks your income up - you might end up in a higher bracket, or disqualify yourself from government assistance like ACA subsidies.
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Old 04-18-2020, 04:31 PM   #6
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Your employer has to elect to allow these distributions from their plan, and with all of the government assistance already pledged, many won't allow it.
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Old 04-18-2020, 05:07 PM   #7
Confused about dryer sheets
 
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Quote:
Originally Posted by bigcmagor View Post
Your employer has to elect to allow these distributions from their plan, and with all of the government assistance already pledged, many won't allow it.
I went to distribution process until "confirm" step and I haven't seen any requirement to approve by my employer.
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Old 04-18-2020, 07:33 PM   #8
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My employer 401k annual summary of benefits roughly says: "All payouts/loans while employed must be approved by employer."

It is not necessarily government controlled it is an employer controlled.

I retired in April 2020, I can not take money out of my 401k until my employer tells TIAA I am not employed. Was told this may take several month, by a TIAA representative.

Are 401k accounts included in the CARES legislation?

IRAs are, not sure about 401ks.
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Old 04-18-2020, 07:49 PM   #9
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Quote:
Originally Posted by TN Jim View Post
My employer 401k annual summary of benefits roughly says: "All payouts/loans while employed must be approved by employer."

It is not necessarily government controlled it is an employer controlled.

I retired in April 2020, I can not take money out of my 401k until my employer tells TIAA I am not employed. Was told this may take several month, by a TIAA representative.

Are 401k accounts included in the CARES legislation?

IRAs are, not sure about 401ks.
As I mentioned above I tested the system and went through withdrawal process on Fidelity (thats where my employer manages our 401K) up to "confirm" phase. I didn't push "confirm" button as I will max up my contributions during the next 3 payrolls before I make the withdrawal.
Yes, 401 K are included. Also in your case you wanted to withdraw your 401 K due to end of your employment. That's different.
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Old 07-06-2020, 02:43 PM   #10
Confused about dryer sheets
 
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Quote:
Originally Posted by TN Jim View Post

IRAs are, not sure about 401ks.
I retired at 50 at end of 2018. My 401K thru my large mega corp former employer is managed by Fidelity. Fidelity informed me that my former employer is not providing a provision for the CARES distribution. I asked him what percentage of companies that Fidelity manages the 401Ks are providing this provision, and he estimated 50%.

I intend to execute, but will have to distribute from an IRA, not the 401K.
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