From my understanding, financial hardships related to COVID-19 can qualify an individual to withdraw money from their 401k, with literally no penalty so long as it is repayed to a similar retirement account within 3 years.

What qualifies as a COVID hardship?

In my friends case, he lives at home with 3 people with preexisting conditions that make them vulnerable, they are also 60, 83, and 85 years old. He also has to work from home now, so a combination of factors makes moving out more appealing (Reduce risk to family, and have a place to work comfortably and efficiently from home so that his job is secure, instead of the current situation where 4 people and 4 dogs share 975 sq feet, and he can be interrupted during meetings and heavily distracted while working)

My friends bank account was essentially cleaned out in a bad divorce, but he has over $60,000 in his 401k and income such that he could withdraw 25,000 for a down payment and a preowned car, and realistically could repay that withdrawal in under 13 months (certainly within the 3 years set forth by the CARES Act)

Would this qualify as a covid related hardship? Certainly the parents and grandparents could deem it too dangerous to be exposed and kick him out, and would it be a hardship then?

To clarify, he has not lost his job, and noone in his family has caught covid-19, but it is putting a strain on his ability to work, and exposing vulnerable parties.

1 Answer 1


Sorry, no. See https://www.irs.gov/newsroom/relief-for-taxpayers-affected-by-covid-19-who-take-distributions-or-loans-from-retirement-plans and you can download the more detailed notice 2020-50 from there or see the official copy in the IRB. 'Qualified' people for CARES are if you (or spouse or dependent) are infected, or if you (or spouse or household member in some cases) lose money (layoff, reduced hours, reduced pay, reduced business revenue, etc). Yourself or household members being at risk isn't covered -- at least not yet; either the administration (IRS) or Congress could well act to expand this, especially as the elections approach, and it's not unusual for them to make those kinds of changes retroactive.

That said, and although Stack policy is not to encourage lawbreaking, this is one of the very few cases I personally would consider risking it. On your 'side', it cannot be doubted IRS will get a flood of claims both valid and invalid, and both honest mistakes or misunderstandings and fudges or cheats; I'd bet the extra workload will be double or triple that for the 2008 crash and ARRA, and their staffing now is already much worse than then. And Congress, which is reluctant enough to fund enforcement even against blatant criminals, won't ever support the massive increase in audits that would be needed to fully enforce this provision. Heck, IRS has been trying to reduce improper EITC for decades with no visible improvement.

But there may be a better possibility -- does his 401k allow a loan? That doesn't require hardship, and it not only allows and requires you to pay back the principal but also interest, so you don't entirely lose compounding for your retirement assets. It is limited to half your balance or $50k if less, which may not be enough here, although IINM after exhausting the loan limit you can add a hardship withdrawal (less advantageous, but under the circumstances ...).

  • We arent concerned with losing compounding, we have other investment accounts and opportunities, that we have better control over, than the 401k. However, I was unaware that loans had no penalty whatsoever. He could VERY EASILY repay it in the next year - 18 months given his income. Thanks for opening my eyes to this Aug 12, 2020 at 17:39
  • @AlbinoRhino you'll need to find what your company/401k provider will allow for a loan. I think most will allow a loan for money to buy a house or medical treatment not paid for by insurance, but money for a car may not be allowed.
    – mkennedy
    Aug 12, 2020 at 20:03

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