Penalty-free withdrawals from 401(k)s

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CashFlo
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Penalty-free withdrawals from 401(k)s

Post by CashFlo »

This is the kind of story that makes me physically cringe. Please counsel your friends and family, who find themselves in difficult circumstances, to consider this as the absolute last option.

https://www.cnbc.com/2020/03/26/you-can ... vings.html
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prudent
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Re: Penalty-free withdrawals from 401(k)s

Post by prudent »

The story is about proposed legislation. Until there is a law passed by the Senate and the House and it is signed into law, discussion is not allowed.
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LadyGeek
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Re: Penalty-free withdrawals from 401(k)s

Post by LadyGeek »

The bill has been signed into law. This thread is reopened to continue the discussion.
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Tigermoose
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Re: Penalty-free withdrawals from 401(k)s

Post by Tigermoose »

How does one quality for this? Do you have to prove some kind of financial hardship caused by the Coronavirus?
Institutions matter
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whodidntante
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Re: Penalty-free withdrawals from 401(k)s

Post by whodidntante »

I think it's positive to have penalty-free access as an option. I agree that some people will hurt themselves with it. That doesn't mean we would be better off not having the option.
JD2775
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Re: Penalty-free withdrawals from 401(k)s

Post by JD2775 »

i know some of my friends who will probably take advantage of this (assuming they hear about it) , due to their current COVID-19 circumstances. These aren't people with hundreds of thousands of dollars in there either.

Short term relief will trump long term security unfortunately
Lyrrad
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Re: Penalty-free withdrawals from 401(k)s

Post by Lyrrad »

Tigermoose wrote: Fri Mar 27, 2020 4:21 pm How does one quality for this? Do you have to prove some kind of financial hardship caused by the Coronavirus?
It seems to be defined in Sec 2202 of the bill, in subsection (a)(4)(A)(ii).
(ii) to an individual—

(I) who is diagnosed with the virus SARS–CoV–2 or with coronavirus disease 2019 (COVID–19) by a test approved by the Centers for Disease Control and Prevention,

(II) whose spouse or dependent (as defined in section 152 of the Internal Revenue Code of 1986) is diagnosed with such virus or disease by such a test, or

(III) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary's delegate).
It’s the same qualification criteria for the increase in retirement plan loan limit to $100,000 described in Sec 2202 (b).
Alan S.
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Re: Penalty-free withdrawals from 401(k)s

Post by Alan S. »

Here's the key:
or other factors as determined by the Secretary of the Treasury (or the Secretary's delegate).
Such as your dentist shut his doors for 2 months due to Corona, and you had to wait 4 months to have a cavity filled. Cavity got larger and now you need a 10k implant. I guess you were impacted...…….
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Re: Penalty-free withdrawals from 401(k)s

Post by LadyGeek »

^^^ :D
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Lyrrad
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Re: Penalty-free withdrawals from 401(k)s

Post by Lyrrad »

Alan S. wrote: Fri Mar 27, 2020 8:19 pm Here's the key:
or other factors as determined by the Secretary of the Treasury (or the Secretary's delegate).
Such as your dentist shut his doors for 2 months due to Corona, and you had to wait 4 months to have a cavity filled. Cavity got larger and now you need a 10k implant. I guess you were impacted...…….
Well, you’ll need to convince the Secretary to add that additional factor into some official guidance.

To more completely answer the question about needing to prove hardship, Sec 2202 subsection (a)(4)(B) allows for the plan administrator to accept the employee’s certification. So, there probably doesn’t need to be any proof other than the certification.
(B) EMPLOYEE CERTIFICATION.—The administrator of an eligible retirement plan may rely on an employee’s certification that the employee satisfies the conditions of subparagraph (A)(ii) in determining whether any distribution is a coronavirus-related distribution.
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tarnation
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Re: Penalty-free withdrawals from 401(k)s

Post by tarnation »

Looks like maybe a chance to get $100k money from 401(k) to IRA?
https://www.congress.gov/bill/116th-con ... B4B770C2F2
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Cash
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Re: Penalty-free withdrawals from 401(k)s

Post by Cash »

So you can basically withdraw $100k as if you were 59.5. Anything actionable here for people who would continue to invest the money, particularly those in high tax brackets?
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whodidntante
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Re: Penalty-free withdrawals from 401(k)s

Post by whodidntante »

tarnation wrote: Fri Mar 27, 2020 8:32 pm Looks like maybe a chance to get $100k money from 401(k) to IRA?
https://www.congress.gov/bill/116th-con ... B4B770C2F2
How, do you reckon?
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tarnation
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Re: Penalty-free withdrawals from 401(k)s

Post by tarnation »

whodidntante wrote: Fri Mar 27, 2020 9:53 pm
tarnation wrote: Fri Mar 27, 2020 8:32 pm Looks like maybe a chance to get $100k money from 401(k) to IRA?
https://www.congress.gov/bill/116th-con ... B4B770C2F2
How, do you reckon?
Trying to parse:
(A) IN GENERAL.—Any individual who receives a coronavirus-related distribution may, at any time during the 3-year period beginning on the day after the date on which such distribution was received, make 1 or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16), of the Internal Revenue Code of 1986, as the case may be.
...
(B) ELIGIBLE RETIREMENT PLAN.—The term “eligible retirement plan” has the meaning given such term by section 402(c)(8)(B) of the Internal Revenue Code of 1986.
So it looks to me like you can put the money back in an IRA. Anyone else want opine?
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camillus
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Re: Penalty-free withdrawals from 401(k)s

Post by camillus »

You can treat it kind of like a qualified charitable distribution, right?

Withdraw 100k from your 401k, reason: you want to help charities harmed by coronavirus.

Contribute 100k into a Donor Advised Fund

Zero tax liability.
corp_sharecropper
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Re: Penalty-free withdrawals from 401(k)s

Post by corp_sharecropper »

$109 commission to the person who figures out a way to pull $100K out and roll/convert or otherwise get it into a Roth IRA. I don't want to pay for all this madness later on through taxes.
Lyrrad
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Re: Penalty-free withdrawals from 401(k)s

Post by Lyrrad »

camillus wrote: Sat Mar 28, 2020 12:22 am Withdraw 100k from your 401k, reason: you want to help charities harmed by coronavirus.
That doesn’t seem to be one of the criteria defined in the law I think the reasons are clearly defined (which I quoted in a prior post). If one meets one of the criteria, I’m guessing most plans will accept a statement from the employee that certifies that they qualify.

I didn’t look at the withdrawal provisions too closely, but my understanding from reading a summary of these provisions is that if one did one of these withdrawals, one would be able to roll the entire amount back into the 401k plan or into an IRA within three years.

If one only has elective and/or employer contributions in their plan, it does seem like this is a way to get the funds out of the plan without terminating their employment.

I assume a few people will have blog posts about how to do this in the coming weeks.
rockthisworld
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Re: Penalty-free withdrawals from 401(k)s

Post by rockthisworld »

I have around 4K in my 401k and about 120k in my taxable account with about 122k of it with my after tax money. Im trying really hard to have most of my retirement money be tax free one day and Id rather pay the taxes now. Should I withdraw 4K in my 401k and put that into my taxable account through vanguard (VTSAX) and then continue with my 401k and keep letting the taxable grow?

My 401k has an expense ratio that is much much greater than the expense ratio through vanguard of .04%.
GeoMetry
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Re: Penalty-free withdrawals from 401(k)s

Post by GeoMetry »

I imagine it will take a while for the rules to be published and then for the various custodians to implement them because there are so many unanswered questions. My guess is that in the end it will come down to a simple self certification of an adverse financial consequence.

Can you imagine a situation where a person thought they, their spouse, or dependent had COVID-19 but couldn't get a test and was therefore force to pay the 10% penalty. Requiring a test that is not readily available seems problematic.

Isn't there some conflict with HIPAA if you require a person to disclose medical information as a condition of receiving a tax break?

Even if I don't loose income as a result of COVID-19, I could very easily suffer an "adverse financial consequence." I find it difficult to imagine an individual that could not demonstrate an adverse financial consequence.
1. I had to drive to a second store to find toilet paper and I used an extra ounce of gasoline.
2. The value of my investments declined and I sold one share for less than I paid for it.
3. The dividends I received in 2020 are less than they would otherwise have been.
4. I had a cough, I probably didn't have COVID-19, but because of the heightened concern I called in sick when I otherwise would have gone to work. I used sick leave that could have been applied to my Federal Employee Retirement System (FERS) retirement to increase my retirement pay.
5. I had a cough which I would normally just ignore but because of my awareness of COVID-19 I went to the doctor and I had to pay a $30 copay.
6. The interest rate my bank is paying is less than it otherwise would have been.
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camillus
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Re: Penalty-free withdrawals from 401(k)s

Post by camillus »

GeoMetry wrote: Sat Mar 28, 2020 12:36 pmRequiring a test that is not readily available seems problematic.
This is a problem, and a frustrating one. I've already experienced something like it. My workplace set aside special "covid time off" - but required a positive test. I called off work for influenza-like symptoms with a fever, but didn't qualify.

Yes, it could take awhile for dust to settle with this and it's best to wait.
MindBogler
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Re: Penalty-free withdrawals from 401(k)s

Post by MindBogler »

Doesn't this present a potential arbitrage opportunity?

Example Scenario:

1. $15,000 remaining auto loan balance @ 2.49% (assume less than 3 years remaining).
2. Withdraw $15,000 from Vanguard Federal Money Market (.77% 7 day yield) in a TIRA and pay balance.
3. Repay IRA on monthly basis per original loan schedule.

Sure you'd "lose" a few bucks on the interest in the TIRA but you could then reinvest the interest saved during the remaining loan period into a taxable brokerage.

Thoughts?
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tarnation
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Re: Penalty-free withdrawals from 401(k)s

Post by tarnation »

MindBogler wrote: Sat Mar 28, 2020 2:28 pm Doesn't this present a potential arbitrage opportunity?

Example Scenario:

1. $15,000 remaining auto loan balance @ 2.49% (assume less than 3 years remaining).
2. Withdraw $15,000 from Vanguard Federal Money Market (.77% 7 day yield) in a TIRA and pay balance.
3. Repay IRA on monthly basis per original loan schedule.

Sure you'd "lose" a few bucks on the interest in the TIRA but you could then reinvest the interest saved during the remaining loan period into a taxable brokerage.

Thoughts?
Think that’s what they expect most folks to do with it, pay bills like car, house etc.
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huskerfan1414
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Re: Penalty-free withdrawals from 401(k)s

Post by huskerfan1414 »

Following.
If taking it out to put in roth is legal now im totally doing it
The more I learn, the dumber I feel.
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tarnation
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Re: Penalty-free withdrawals from 401(k)s

Post by tarnation »

I think you can go from 401(k) to trad Ira, then convert to roth as usual.
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GeoMetry
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Re: Penalty-free withdrawals from 401(k)s

Post by GeoMetry »

Hypothetically, if I was employed in an essential service and I have not myself lost any income as a result of Corona virus, but my spouse's income has been reduced as a result of Corona virus, do you think that will qualify ME for a penalty free withdrawal from MY retirement account?

Does it make any difference if my spouse does/does not have any retirement accounts of her own?
MotoTrojan
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Re: Penalty-free withdrawals from 401(k)s

Post by MotoTrojan »

rockthisworld wrote: Sat Mar 28, 2020 7:41 am I have around 4K in my 401k and about 120k in my taxable account with about 122k of it with my after tax money. Im trying really hard to have most of my retirement money be tax free one day and Id rather pay the taxes now. Should I withdraw 4K in my 401k and put that into my taxable account through vanguard (VTSAX) and then continue with my 401k and keep letting the taxable grow?

My 401k has an expense ratio that is much much greater than the expense ratio through vanguard of .04%.
Sounds like a bad idea. Taxable isn’t tax-free.
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tarnation
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Re: Penalty-free withdrawals from 401(k)s

Post by tarnation »

GeoMetry wrote: Tue Mar 31, 2020 6:16 pm Hypothetically, if I was employed in an essential service and I have not myself lost any income as a result of Corona virus, but my spouse's income has been reduced as a result of Corona virus, do you think that will qualify ME for a penalty free withdrawal from MY retirement account?

Does it make any difference if my spouse does/does not have any retirement accounts of her own?
As strict reading, i would say no, unless your 401(k) let’s you self certify, or it falls under the “other” that’s under the secretary’s discretion.
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Re: Penalty-free withdrawals from 401(k)s

Post by WoodSpinner »

camillus wrote: Sat Mar 28, 2020 12:22 am You can treat it kind of like a qualified charitable distribution, right?

Withdraw 100k from your 401k, reason: you want to help charities harmed by coronavirus.

Contribute 100k into a Donor Advised Fund

Zero tax liability.
I have been thinking along these lines but here is additional use that may work for some folks.

Prerequisite:

- You are charitable and are looking to fund a Donor Advised Fund (DAF)

- You itemize or are very close to being able itemize on your taxes.

- You don’t have assets in Taxable with Gains you wish to donate.

Then you can withdraw funds from the IRA/401K and transfer to a DAF. This becomes a charitable deduction with minimal to no tax implications.

Not sure how many of us will fit into this category but perhaps a few can take advantage of it.

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Re: Penalty-free withdrawals from 401(k)s

Post by Monsterflockster »

GeoMetry wrote: Tue Mar 31, 2020 6:16 pm Hypothetically, if I was employed in an essential service and I have not myself lost any income as a result of Corona virus, but my spouse's income has been reduced as a result of Corona virus, do you think that will qualify ME for a penalty free withdrawal from MY retirement account?

Does it make any difference if my spouse does/does not have any retirement accounts of her own?
Do you have kids? Them being home due to school closure is a valid reason.
Last edited by Monsterflockster on Wed Apr 01, 2020 10:20 am, edited 1 time in total.
rockthisworld
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Re: Penalty-free withdrawals from 401(k)s

Post by rockthisworld »

MotoTrojan wrote: Tue Mar 31, 2020 6:20 pm
rockthisworld wrote: Sat Mar 28, 2020 7:41 am I have around 4K in my 401k and about 120k in my taxable account with about 122k of it with my after tax money. Im trying really hard to have most of my retirement money be tax free one day and Id rather pay the taxes now. Should I withdraw 4K in my 401k and put that into my taxable account through vanguard (VTSAX) and then continue with my 401k and keep letting the taxable grow?

My 401k has an expense ratio that is much much greater than the expense ratio through vanguard of .04%.
Sounds like a bad idea. Taxable isn’t tax-free.
I meant that my goal is less taxes in retirement. If I pay the taxes when withdrawing from 401k then put the after tax into VTSAX.
GeoMetry
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Re: Penalty-free withdrawals from 401(k)s

Post by GeoMetry »

Monsterflockster wrote: Wed Apr 01, 2020 12:47 am
GeoMetry wrote: Tue Mar 31, 2020 6:16 pm Hypothetically, if I was employed in an essential service and I have not myself lost any income as a result of Corona virus, but my spouse's income has been reduced as a result of Corona virus, do you think that will qualify ME for a penalty free withdrawal from MY retirement account?

Does it make any difference if my spouse does/does not have any retirement accounts of her own?
Do you have kids? Them being home due to [school] closure is a valid reason.
Our daughter (age 23) is here with us because her school is doing on-line classes and she would prefer to be locked down in our house rather than her small apartment. I would say we are currently providing room and board for her, however on our tax return, she is not a dependent because she has a significant ($50K) income of her own.
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Re: Penalty-free withdrawals from 401(k)s

Post by MotoTrojan »

rockthisworld wrote: Wed Apr 01, 2020 5:38 am
MotoTrojan wrote: Tue Mar 31, 2020 6:20 pm
rockthisworld wrote: Sat Mar 28, 2020 7:41 am I have around 4K in my 401k and about 120k in my taxable account with about 122k of it with my after tax money. Im trying really hard to have most of my retirement money be tax free one day and Id rather pay the taxes now. Should I withdraw 4K in my 401k and put that into my taxable account through vanguard (VTSAX) and then continue with my 401k and keep letting the taxable grow?

My 401k has an expense ratio that is much much greater than the expense ratio through vanguard of .04%.
Sounds like a bad idea. Taxable isn’t tax-free.
I meant that my goal is less taxes in retirement. If I pay the taxes when withdrawing from 401k then put the after tax into VTSAX.
Would you rather pay $20K/year in taxes in retirement and have $80K to spend after, or $10K/year in taxes but only $70K leftover? Minimizing taxes paid makes zero sense; you want to maximize after tax value.
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Re: Penalty-free withdrawals from 401(k)s

Post by SpartanFan »

Penalty free but still must pay taxes on the dist. :(
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GeoMetry
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Re: Penalty-free withdrawals from 401(k)s

Post by GeoMetry »

In order to take advantage of section 2202 one of the qualifiers is that you are "diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention"

How do I know if the test I was diagnosed with was "approved by the CDC?" now that I have recovered is there a CDC approved antibody test?

Is there such a thing as a CDC approved Coronavirus test?
Independent George
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Re: Penalty-free withdrawals from 401(k)s

Post by Independent George »

SpartanFan wrote: Wed Apr 01, 2020 7:43 am Penalty free but still must pay taxes on the dist. :(
Drat. I was actually just about to ask - if it wasn't taxed, it could actually make sense to withdraw the 100k and immediately park it into FZROX until retirement, and then get taxed at cap gains rates instead of income tax rates.
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Re: Penalty-free withdrawals from 401(k)s

Post by Devil's Advocate »

Monsterflockster wrote: Wed Apr 01, 2020 12:47 am
GeoMetry wrote: Tue Mar 31, 2020 6:16 pm Hypothetically, if I was employed in an essential service and I have not myself lost any income as a result of Corona virus, but my spouse's income has been reduced as a result of Corona virus, do you think that will qualify ME for a penalty free withdrawal from MY retirement account?

Does it make any difference if my spouse does/does not have any retirement accounts of her own?
Do you have kids? Them being home due to school closure is a valid reason.
Would it be a valid reason if she wasn't working before the pandemic?
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tarnation
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Re: Penalty-free withdrawals from 401(k)s

Post by tarnation »

Devil's Advocate wrote: Tue May 12, 2020 9:47 pm
Monsterflockster wrote: Wed Apr 01, 2020 12:47 am
GeoMetry wrote: Tue Mar 31, 2020 6:16 pm Hypothetically, if I was employed in an essential service and I have not myself lost any income as a result of Corona virus, but my spouse's income has been reduced as a result of Corona virus, do you think that will qualify ME for a penalty free withdrawal from MY retirement account?

Does it make any difference if my spouse does/does not have any retirement accounts of her own?
Do you have kids? Them being home due to school closure is a valid reason.
Would it be a valid reason if she wasn't working before the pandemic?
Yes because she couldn’t go get/seek a job due to child care. But is there any age limitation on the age of children?
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Devil's Advocate
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Re: Penalty-free withdrawals from 401(k)s

Post by Devil's Advocate »

tarnation wrote: Tue May 12, 2020 9:55 pm
Devil's Advocate wrote: Tue May 12, 2020 9:47 pm
Monsterflockster wrote: Wed Apr 01, 2020 12:47 am
GeoMetry wrote: Tue Mar 31, 2020 6:16 pm Hypothetically, if I was employed in an essential service and I have not myself lost any income as a result of Corona virus, but my spouse's income has been reduced as a result of Corona virus, do you think that will qualify ME for a penalty free withdrawal from MY retirement account?

Does it make any difference if my spouse does/does not have any retirement accounts of her own?
Do you have kids? Them being home due to school closure is a valid reason.
Would it be a valid reason if she wasn't working before the pandemic?
Yes because she couldn’t go get/seek a job due to child care. But is there any age limitation on the age of children?
I doubt age would matter. Anyway, would it even matter unless you were audited?
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quisp65
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Re: Penalty-free withdrawals from 401(k)s

Post by quisp65 »

"or having work hours reduced due to SARS-CoV-2 or COVID-19"

A liberal IRS interpretation of the above qualification will qualify just about everybody. When I put that search term in google I ran across my state of California's unemployment benefits listed below....

"Would I qualify for benefits if I choose to stay home from work due to underlying health conditions and concerns about exposure to the virus?
You can be eligible for benefits if you choose to stay home. Once you file your claim, the EDD will contact you if we need more information"

Though what I quoted is California... if they are allowing unemployment benefits for choosing to stay home over concern about health, you would think they would allow waiving the 10% tax penalty for withdrawing your own money. I'm hoping for a liberal interpretation of "reduced work hours" through choice.

I noted it took 2 months for the IRS to issue guidance on the similar Katrina 401k/IRA $100K withdrawal rule. Maybe we'll get further guidance in June.
Plan: 75/25 stock index/cash investments, one-way balance market highs, slide withdrawal rate to comfort
GeoMetry
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Re: Penalty-free withdrawals from 401(k)s

Post by GeoMetry »

I am looking at my wife's overtime for the months of April and May, it was lower each pay period since March than the same pay period in any of the last three years. In addition overtime in each pay period was less than the average for the same pay period over the last 2,3,4 or 5 years. That's as far back as I looked it might go back even more. So does that qualify as loss of hours due to Coronavirus? She could easily say she felt unsafe because of Coronavirus and as a result she accepted less overtime. Problem is, like others have said, I'm not sure if working less hours by choice would qualify. I need to find something in writing that indicates they have less overtime because of Coronavirus and that would make me feel like she has a qualification I could defend. I did see the press release when the quarterly report came out an it mentions "lower volume." as a result of Coronavirus but does not speak directly to overtime.
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