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CARES Act: 403(b) Distributions

April 5, 2020

The CARES Act permits several ways to access IRA and defined contribution plan — 403(b), 457(b) and 401(k) — money.  

Direct Access

Up to $100,000 aggregated across all accounts will not be subject to the 10% early withdrawal penalty. To qualify you must have been affected by COVID-19, but what qualifies is quite broad. The following scenarios qualify you, according to Jeffrey Levine of kitces.com

  • Have been diagnosed with COVID-19
  • Have a spouse or dependent who has been diagnosed with COVID-19
  • Experience adverse financial consequences as a result of being quarantined, furloughed, being laid off, or having work hours reduced because of the disease
  • Are unable to work because they lack childcare as a result of the disease
  • Own a business that has closed or operate under reduced hours because of the disease; or
  • Meet some other reason that the IRS decides is permissible

There are several tax benefits associated with these distributions:

  1. 10% tax penalty is waived (still taxed as ordinary income)
  2. Not subject to mandatory withholding (normally 20% for 403(b) and 457(b) plans)
  3. Up to three years to return funds (not required to return)
  4. Can spread total over three years for purposes of calculating withdrawal tax

Word of Caution about withdrawals

Many K-12 403(b) investment choices contain onerous surrender charges (typically variable annuity and equity-indexed annuity products). Check to see what if any surrender charges apply before accessing money. If surrender charges exist, it might make more sense to take out a loan (see below). 


There is another, non taxable way to access plan money. The CARES Act greatly liberalizes the availability of plan loans. Previously the maximum permited was the lesser of $50,000 or one half of account value. Now you can now borrow up to $100,000 and up to 100% of your vested balance. Similar to distribution information above, you must have been affected by COVID-19. 

Word of Caution about loans

First, most 401(k) plan loans are tied to your continued employment. This means that you can only pay the loan back while working, if you stop working the loan becomes due and payable, otherwise the existing loan amount is subject to income taxes in that year (not clear if subject to 10% penalty under new law). Teachers generally pay their loans back via an automatic withdrawal from their checking account and these payments can continue even if terminated or retired without triggering the loan as a taxable event. You will want to verify this before taking a loan.

Second, be careful of agents advising you to move your money to a new product in order to take a plan loan. This could trigger a surrender charge, put you in another bad plan, and/or move you from a good plan to a bad plan. If your 403(b) product doesn’t offer a plan loan and you need to move your money to one that does (via an exchange), you will want to ensure that the new product has no surrender charges, is low in cost, and doesn’t charge a commission.

Third, plan loans generally require you to liquidate your holdings prior to accessing money. If your account is heavily invested in stocks, you are going to be selling stocks after they’ve had a significant drop. You will have effectively locked in your loss. We realize that sometimes you don’t have a choice, but please beware of this. If possible, take the loan from the safe portion of your holdings.

Fourth, double taxation can be an issue with plan loans, though not in the way most finance articles suggest (taxes are not owed on entire amount paid back). The interest that you pay on your plan loan is basically an after-tax contribution to your 403(b), but it doesn’t create a basis (portion already taxed) and thus any interest paid into your account will end up being double taxed at withdrawal. It’s not a huge issue, but something to be aware of. 

Fifth, many 403(b) loans today are “collateralized” which means the insurance company will put a freeze on a portion of your account and then make a separate loan to you that the insurance company earns profits on. This practice is rare in 401(k)s, but very common in 403(b) and it’s unnecessary. It's an additional way insurance companies take advantage of their policyholders (even TIAA does this). You might not have a choice, but at least you’ll be informed.

Please post your questions on the 403bwise Discussion Board and on our Facebook Group

by Scott Dauenhauer, CFP

Related Podcast:

We discuss the recently passed CARES Act and how it impacts teachers. Listen Now »