17 Dec Should I worry about a 401(k) loan becoming a distribution?

Q. I’m afraid I may lose my job and I’m trying to decide if I should take a 401(k) loan anyway. What should I consider, and can I make it a coronavirus-related distribution if I’m laid off? I’m 43.
— Still working

A. The CARES Act act made it much easier for those impacted by the coronavirus to draw down on 401(k)s and IRAs before age 59 ½.

It provided liquidity, allowing you to take out $100,000 this year while not incurring the 10% early withdrawal penalty, said Bill Connington of Connington Wealth Management in Paramus.

You would also have up to three years pay the taxes owed.

He said to take the distribution, you need to have been affected by coronavirus by either testing positive, loss of a job or having a reduced income.

If you take a 401(k) loan, the same rules apply, but you have six years to pay it back, he said.

“If you follow those rules then you need to decide if you are losing your job or it is just a possibility, but the old adage is: You need to pay the bills today and then figure out tomorrow,” Connington said.

If you do lose your job, you probably have a specific period set by the plan administrator to pay it back, otherwise it would be considered a distribution and taxes would be owed.

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This story was originally published on Dec. 17, 2020.

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