CARES Act SBA Stimulus Update: Penalty Free Financing with Your Retirement Savings
Recently, I noticed three BizBuySell Finance Center clients using the same source of down payment for an SBA 7(a) loan to buy an existing business. All three savvy buyers are taking advantage of a lesser known CARES Act provision as a down payment for an SBA 7a business acquisition loan.
In specific, the CARES Act allows eligible participants in certain tax-advantaged retirement plans — including 401(k), 403(b), 457, and Traditional IRA plans — to take an early distribution of up to $100,000 during calendar year 2020 without paying the 10% penalty tax the law imposes on most retirement account withdrawals before an account owner is 59 ½. Note that this is $100,000 in total, per person, no matter how many retirement accounts you have.
The CARES act also suspends the mandatory 20% tax withholding requirement that normally applies to early distributions from a 401(k) or other workplace retirement plans. There is no withholding requirement on early withdrawals from IRAs. (Source: CARES Act SEC. 2202. SPECIAL RULES FOR USE OF RETIREMENT FUNDS)
Requirements - Must be adversely affected by COVID-19
- Experienced adverse financial consequences caused by the coronavirus, such as being laid off, having hours reduced, being quarantined or furloughed; or,
- Experienced adverse financial consequences as a result of being unable to work due to lack of child care; or,
- Experienced adverse financial consequences as a result of closing or reducing hours of a business that you own or operate; or,
- The individual or their spouse has been diagnosed with COVID-19.
The retirement plan can rely on a participant’s written statement that he or she meets the conditions. The SBA lender does not need to be provided with such a written statement.
The Impact
For many people, especially with a climbing unemployment rate, this will open up a large distribution amount from IRAs which usually don’t allow for loans. As people are laid off, experience decreased income due to the economic changes, or are otherwise financially impacted by the coronavirus, they can tap into their retirement accounts without penalty tax and repay it over a few years. It’s important to note that you can use the funds for a short-term need, and you can repay it so you don’t wipe out your long-term retirement funding.
Three Scenarios Used By BizBuySell Finance Center SBA Buyers
- Husband and wife each used $100,000 from their retirement plans as a down payment for a $1.8MM SBA business acquisition loan plus cash reserves.
- Parents gifted son $100,000 to use as down payment for an SBA 7(a) small business acquisition loan. Working capital was provided with the loan to meet the lender's liquidity requirement.
- $100,000 was used by a couple as a down payment to buy the business one spouse works for.
This CARES Act incentive can be used until December 31st, 2020. Be sure to check with your financial planner or tax advisor before making any changes to your retirement plan.