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CARES Act Provides Short-Term, Tax-Free Liquidity Solution

COVID-19 revealed a clear liquidity need in the U.S., making the phrase “cash is king” ring truer than ever.

The Small Business Administration reports that businesses tapped $510.2 billion in Paycheck Protection Program funding as of May 30. At the same time, individual account holders at major retirement firms and state-sponsored plans increasingly are withdrawing money, according to this article in the Wall Street Journal.

Thankfully, the federal government made it easier and cheaper to access short-term liquidity.

Uncle Sam CARES

Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, you can take a potentially tax-free distribution from a qualified retirement account.

The law allows penalty-free distributions of up to $100,000 from 401(k) plans, individual retirement accounts and the like for qualified hardships resulting from COVID-19, including the loss of income. Taxes on these distributions can be spread out evenly over the next three years, with payments due each April, starting in 2021.

Most importantly, if the distribution is redeposited into the retirement account before the end of 2022, no additional taxes are due. Plus, any taxes paid are credited back.

These critical provisions effectively make CARES Act distributions tax-free, provided the money is repaid before 2023. If not, tax costs likely will eliminate any benefit of this strategy.

Unprecedented Times

We don’t often recommend taking early distributions from retirement accounts, specifically loans. There are too many potential negative impacts on long-term retirement income.

However, today’s situation isn’t typical, and a CARES Act distribution is not a standard retirement account loan.

Loans often carry 5 percent interest rates (or more) and require immediate monthly repayment with interest. While not taxed, loans don’t achieve the same short-term liquidity goals as CARES Act distributions because interest is paid with after-tax funds.

Mitigating Risk

We also don’t recommend selling in down markets because remaining fully invested greatly aids recovery.

As such, a small portion of the CARES Act distribution could be used to lessen the risk of not being fully invested. While beyond the scope of this article, implementing something like a bullish S&P 500 options strategy could reduce opportunity costs and keep you invested in the equity markets to participate in potential market gains.

The remainder of the distribution should be used for needs and held conservatively. Remember, if the distribution isn’t fully paid back by 2023, taxes and potential market gains could erase any benefits.

Get Help

CARES Act distributions can be viable solutions for short-term liquidity needs. But they should be done carefully and in the context of a larger financial plan.

There are opportunity costs, like missing out on market gains and funds being subject to bankruptcy and liability proceedings, to name just two. Similarly, timing matters. Option premiums constantly change, so costs can vary greatly, depending on when trades are executed.

Not realizing this can be damaging, so get professional help. Rehmann can tailor a CARES Act distribution plan to your specific needs. To get started, contact us at 866.799.9580, via email or at

Rehmann is focused on providing practical guidance and insights to help empower organizations and individuals as we navigate through the uncertainty and complexity of this pandemic, together. Find resources and guidance at our COVID-19 Knowledge Center. Please click here to subscribe to our communications to ensure you remain up to date during these uncertain times.


Securities offered through Rehmann Financial Network, LLC, member FINRA/SIPC. Investment advisory services offered through Rehmann Financial, a Registered Investment Advisor. Insurance services offered through Rehmann Insurance Group. Rehmann is an independent member of Nexia International. Nexia is not affiliated with Rehmann Financial Network, LLC, Rehmann Financial or Rehmann Insurance Group.

Published in Wealth Management

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