The rules in place for taking early withdrawals from your retirement account for a hardship permanently reduce your retirement savings because ordinarily you are not allowed to put the money back into the retirement account after the hardship has passed and you must pay income tax on it. In addition, you must pay a 10 percent penalty if you withdraw funds before reaching the retirement age of 59½.

THE CARES ACT Allows You to  Borrow From Your Retirement Account

As explained by the Securities and Exchange Commission (“ SEC”), the CARES Act provides significant, temporary relief from these provisions for individuals who experience adverse financial consequences as a result of COVID-19 related events. The CARES Act allows qualified individuals impacted by the coronavirus pandemic to pay back funds withdrawn from a qualified retirement plan over a three-year period, and without having the amount recognized as income for tax purposes. The new law also temporarily waives the 10 percent early withdrawal penalty for coronavirus-related distributions (CRDs) made between January 1 and December 31, 2020.  In addition, the CARES Act exempts CRDs from the 20 percent mandatory withholding that normally applies to certain retirement plan distributions. 

The CARES Act also doubles the ordinary retirement plan loan limits for qualified individuals to the lesser of $100,000 or 100 percent of the participant’s vested account balance. You will not owe income tax on the amount borrowed from the 401(k) if you pay it back within five years. In addition, qualified individuals with an outstanding loan from their plan (meaning a loan taken before the CARES Act was enacted) that has a repayment due between March 27 and December 31, 2020, can delay their loan repayments for up to one year. However, interest will continue to accrue on these delayed payments.

This CARES Act benefits greatly reduce the costs of accessing funds held in retirement accounts, particularly for short term needs, such as severe economic hardship, when the investor expects to return the funds.  

With every new source of cash, however, there are always fraudsters seeking to prey on victims.  

Some unscrupulous individuals are using these CARES Act benefits, which are intended for those facing economic hardship from COVID-19, to promote high-risk, high-fee investments and other inappropriate products and strategies using borrowed retirement funds. These include products and strategies that have high fees and costs, are not designed to be temporary and, as a result, are unlikely to provide investors with the intended benefits of the CARES Act, particularly over time. 

Ways to Protect Yourself from Fraudulent CARES Act Promotions

If you are contacted by a professional who recommends that you withdraw money from your retirement savings to invest in securities—either through their firm or in your own self-directed investment account—be sure to first confirm whether they are licensed to give advice or sell investments

You can verify the status of investment professionals and find out whether they have a history of customer complaints by using free tools from the SEC and FINRA.

  • Also, always be on the lookout for the red flags of fraud:
  • Unlicensed investment professionals
  • Aggressive sellers who may provide exaggerated or false credentials
  • Offers that sound “too good to be true”
  • “Risk-free” investment opportunities
  • Promises of great wealth and guaranteed returns
  • “Everyone is buying it” pitches
  • The pressure to invest right now
  • Over-the-top, sensational pitches that may have fake testimonials
  • Unsolicited pitches seeking to obtain your personal information
  • Asked to pay for investments by credit card, gift card,  or wiring money abroad or to a personal account

Remember that most every investment involves some type of risk. Be especially wary of claims that a return is “guaranteed.”

Consider These Things Before Selling or Borrowing Against Your Retirement Accounts to Make New Investments in Securities

The SEC has set forth specific considerations you must think about if you are considering withdrawing or borrowing money from your retirement plan for the specific purpose of investing—especially if you are doing this at the urging of a promoter or investment professional. 

You May Pay High Fees to the Promoter.

The promoter may charge you a fee or commission for the investments they are offering. In addition, the promoter or a person or company related to the promoter may impose ongoing costs and fees on the investment. High initial and ongoing fees for retirement investments are a red flag.  Ask if there are any upfront or ongoing fees or commissions.  In other words, ask how much of your money is working for you and how much is going to others. 

1. It is Maybe Difficult or Costly to Sell the Promoted Investment.

The promoted investments may have fees for early withdrawals or may otherwise make access to your savings costly or difficult. Ask if there are any fees or restrictions on early withdrawal or any sale.

2. Selling at Low Prices Locks in Your Losses.

Taking money from your retirement account usually requires you to sell some of the investments in your account—and you might not be able to choose which ones. In many plans, the money is taken in equal portions from each of your different investments. For example, if you have money in four mutual funds, 25 percent of the loan total comes from each of the funds. If you liquidate investments when the market is down or prices are otherwise low, you will lock in losses.

3. You May Lose Out on Compounding.

Withdrawing money from a retirement account, even without a 10 percent penalty, can have significant impacts on your future retirement savings because you lose out on the compound growth from any funds you withdraw.

4. You May Significantly Increase Your Risk.

When you buy securities with money from a 401(k) loan, you are investing with borrowed funds. While this can increase your buying power, it also increases your exposure to market risk at the very same time you are hoping your investment will increase in value. If the investment sours, including as a result of high fees and costs, you not only stand to lose the amount you invest, but you also might have difficulty repaying the funds withdrawn or loaned within the respective three- or five-year time periods. You further compound your risk if you put your money in higher-risk and higher-fee investments than those available in your 401(k) plan.

5. Eligibility and Availability Are Designed to Address Hardships, Not Increase Investment Options.

The CARES Act relief described above is available to individuals: (1) diagnosed with COVID-19; (2) whose spouse or dependent is diagnosed with COVID-19; or (3) who experience adverse financial consequences as a result of certain COVID-19 related events. You will be required to sign a certification of the reason for the CRD, although your plan administrators are not required to verify such certifications. Your employer might or might not do so. Importantly, your employer may, but is not required to, offer COVID-19-related distributions and loan relief under its plans. Be sure to find out before taking any action.

Your retirement account is your nest egg and should be safeguarded at all costs. Before making any investment decision, including a decision to withdraw or borrow money from your retirement account for the purpose of investing in securities, make sure you research your investment and the seller thoroughly. Know who you are dealing with, be wary of fraudulent investment scams, and be sure you understand how the investment fits into your overall financial plan.


If you or a loved one has lost retirement money as a result of a scam, contact the offices of Investment Fraud lawyer Melanie Cherdack for a free consultation. Because she has been in the trenches as a former Wall Street attorney,

Melanie Cherdack and her team of experienced attorneys have seen just about every type of investment fraud or investment scam. While almost every investment carries a degree of uncertainty and risk, you may have been unnecessarily exposed to such risk. Former Wall Street securities attorney Melanie S. Cherdack and her team of lawyers represent individual and institutional investors who are unwitting victims of investment fraud and broker negligence. She heads up a group of attorneys who represent investors across the United States. Contact us by filling out our online contact form, or calling 888-768-2499.