Provisions in the new stimulus bill designed to help small-business owners--like Economic Injury Disaster Loans (EIDL) and the Paycheck Protection Program (PPP)--have justifiably received plenty of attention.

That's especially true since a portion of those loans may turn out to be forgivable, making at least some of the funds received more of a grant than a loan.

The problem is, some small-business owners may not qualify. (And individuals don't qualify at all.)

Others may not be able to wait for funds. While small businesses and sole proprietors can apply starting April 3, self-employed and independent contractors can't begin the application process until April 10. 

And while the potential for loan forgiveness is obviously attractive, provisions do apply: As Kevin Ryan writes, at this point it appears that no more than 25 percent of the forgiven PPP amount can be used for non-payroll expenses.

All of which means an EIDL or PPP may not be right for your business.

Or even available to you.

But there is another form of relief provided by the CARES Act: The bill establishes new exceptions to allow people affected by the Covid-19 pandemic to tap into their IRA and 401(k) accounts, whether through a loan or an early distribution, with fewer 
restrictions. 

Which makes the estimated $32 trillion held in retirement accounts at the end of last year a potential source of short-term relief not only for small-business owners, but also for affected individuals. 

Let's look at loans first.

Borrowing From Your Retirement Account

Keep in mind, you've always been able to borrow from your 401(k). If you're an employee with a plan allows for loans, you could borrow up to half of your account's value or $50,000, whichever amount was higher. 

Under the new law, you can now loan yourself up to $100,000, and the provision that you can borrow only up to 50 percent of your account's value has been waived.

As long as you qualify, that is: The guidelines state you must have suffered "adverse financial consequences" from the pandemic. 

Fortunately, "adverse" is defined fairly broadly:

  • If you, your spouse, or a dependent has been diagnosed with Covid-19
  • If your area is subject to quarantine
  • If you've had to close your business or reduce your hours
  • If you've been unable to work due to child-care issues
  • If you're not self-employed and have been laid off, had your hours reduced, etc.

Your plan sponsor will be responsible for determining if your adverse financial consequences qualify, but it appears that all you have to do is certify that you're facing financial adversity due to the pandemic.

If you qualify, what can you do with those funds? Anything you choose: Payroll, rent, supplies, personal expenses; what you do with the money is up to you.

But be aware, borrowing from your 401(k) is a loan. Still, while you will pay slightly over 5 percent interest, you pay yourself that interest--the money goes into your 401(k), not to the plan administrator.

And there won't be penalties or taxes involved as long as you pay the loan back within five years, and in "substantially level" payments, which means making at least quarterly payments; last-minute balloon payments aren't allowed. (But you can pay it off early.)

Any amount you don't pay back will be considered a distribution, which means you may owe penalties and applicable taxes--a distribution is considered income and will be taxed as such. And you only have until September 23, 2020 to take advantage of the broader provisions. Unless the bill gets extended, loans taken after that date will fall under normal 401(k) guidelines.

Now let's look at retirement account distributions.

Taking a Distribution From Your Retirement Account

The new law also creates a penalty-free early distribution rule, using similar "adverse financial consequences" guidelines: If you have a 401(k) or IRA and are under age 59-and-a-half, you can take a penalty-free retirement account distribution of up to $100,000. 

Unlike a loan, all retirement accounts are included: 401(k)s, pension plans, 457 and 403(b) plans...as well as IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs.

You will still be taxed on the funds distributed--that hasn't changed. What has changed is the 10 percent early withdrawal penalty is waived.

You can, though, spread the tax owed over three years, as opposed to one, and doing so might help you stay in a lower tax bracket.

And if you pay your retirement account back, you could avoid being taxed altogether. The new provision lets you pay yourself back over a three-year period, either in multiple payments or by making one lump-sum payment before the three-year window closes. 

That could make a distribution a lot like a loan, except you have five years to pay back your retirement account if you take out a loan, whereas with a distribution you only have three. (Then again, with a distribution you won't have to make regular payments along the way.)

Penalty-free distributions can be taken up through December 31, 2020.

Should You Borrow or Take a Distribution From Your Retirement Account?

Many financial advisers see borrowing from a retirement account--much less taking a distribution--as a financial last resort.

If your account has lost value over the past month, you're already "down," and tapping into your retirement account only further depletes your nest egg.

Talk to your accountant. Talk to a financial adviser. Talk to people who know your business and personal financial situation and can give you specific advice for your individual needs.

Only you can decide whether a PPP, or an EIDL, or a retirement account loan or distribution--or, really, any financial decision--is right for you.