Chuck D

If you're thinking you may be in the possible "furlough window" and are committed to aggressive savings right now and accordingly cut your 401k contributions, maybe this CARES provision offers another option (with pros and cons) to consider.

Instead of cutting your 401k contribution to get more into savings, you could consider keeping your normal contribution (but avoiding RHA spillover if that's a possibility) into the PRAP/PCRA and investing conservatively or just putting it straight into cash or one of the stable value funds which would be pretty equivalent to putting it into savings.

If before the end of 2020 you know your number is up for furlough (or still expect it) you can still take out up to $100k (or apples to apples, choose to take only the equivalent of what would have gone into savings otherwise) and it's basically no harm no foul with the added potential benefit of being taxed as income you can spread out over up to 3 years (when your income and tax hit may be low, thus reducing your overall taxable income over that stretch).

Pros:

if you never get furloughed you have maxxed your 2020 contribution which otherwise wouldn't have happened and couldn't be recovered.

if you are furloughed and you do withdraw that cash, but are then in good financial condition in the next year or two (recalled, new job) you have 3 years to repay that into your 401k, though I'm less sure of the tax implications of that. If repaying with after tax money does it go into Roth side or regular 401k? Guessing regular and that's more of a tax hit.

Apples to apples it seems a better tax situation if you're furloughed to max your 401k contribution now (again minus RHA spillover which seems like the least area of concern for those in the furlough window and not near retirement age) and benefit from the reduction in 2020 of taxable income at a high marginal tax rate, then pull that same amount of cash if you need it in DEC that would otherwise have gone to after tax savings, then just take the tax hit spread out over 2-3 years in the event you're out of work, paying taxes at the lower marginal rate.

Cons:

Once in 2021, if things had looked good and you didn't take out the 100k, then you do get furloughed, current CARES act provisions don't seem to allow that withdrawal past the end of this year and I'm unfamiliar with all the pitfalls/penalties of pulling from 401k for emergency purposes normally.

If never furloughed and never experience a significant income hit, this now adds to your tax burden over next 3 years at your marginal rate, which could cost you a bit more, or I guess just buy a boat with cash lol.

I plan to check in with Schwab on this also but would like to hear other pros/cons from anyone weighing this.

Chuck D

*not professional advice - more of a stayed at a Holiday Inn Express level...

no clue if this gets extended and oh so hope it's not necessary, but coming into election silly season I wouldn't be surprised by anything.

jumppilot

Or just take out $100k, pay off your debt, and have a huge emergency fund.

That’s what I did. Time from paperwork to direct deposit was 5 business days.

My wife also took out $100k, as I believe it’s per person. We paid off our house and have zero debt. Excellent way to head into a furlough.

JetBlast77

Did you have to mail in any paperwork? Or did you set it up all over the phone? Thx

WhiskeyDelta

I thought the CARES Act was clear that you had to have a direct COVID-19 hardship, lost job, medical bills, etc. Without those verifiable issues, you still have to pay the 10% withdrawal penalty. At that’s what I remember reading. I’m a Delta guy, maybe our plan rules for this are different but I’d be surprised if it were.

13n144e

How much of a tax hit did you take on that? Are you spreading it out over the three years?

jumppilot

Download the paperwork through the Schwab PRAP site, complete it, and submit online through the secure message center. Easy.

Took 15 minutes from start to finish.

jumppilot

I’m getting downgraded. I’m affected.

Generally though, it’s pretty easy to prove you’ve been affected. My kids school is closed which means I can’t pick up that extra trip, my wife has to watch the kids and can’t go to work, open time is non-existent, etc etc. I anticipate it’ll be a self certifying event when you do your taxes. If you get audited, it’ll be easy to prove.

Basically, if you are alive in 2020, you’ve been affected in some way by COVID. In addition, the government wants the tax revenue. I doubt they’ll complain you paid distribution taxes.

”Qualified individuals may take up to a $100,000 distribution (in aggregate) from their qualified retirement plans. The waiver is available to individuals: (1) diagnosed with COVID-19; (2) whose spouse or dependent is diagnosed with COVID-19; or (3) who experience adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the U.S. Treasury Secretary.”

jumppilot

No, I did some quick math to figure my effective tax rate and had the taxes taken out of the distribution. I don’t know if I’ll have a job over the next 3 years to pay those taxes back.

fadec

Wouldn't it be better to wait until the January after furlough if you want to pay minimum tax?