
Should You Withdraw Your 401k Early To Offset COVID-19 Expenses?
4-minute readSeptember 21, 2020
Read more on our COVID-19 Resource Guide.
Removing money from a 401(k) savings account before retirement often comes with significant payments and penalties attached. But the $2 trillion CARES Act coronavirus relief bill that the government has proposed aims to allow cash-strapped Americans to access their retirement savings to cover everyday expenses and bills without being penalized. It likewise promises to allow retirees the option to defer making minimum retirement distributions in a year when the market is down more than 20% from its February 2020 highs.
How To Withdraw Money Under The CARES Act
Traditionally, a 10% penalty on funds would be imposed if you sought to remove cash from your retirement account before age 59½, unless you’d suffered significant medical or economic hardship. Those over age 55 who’ve lost a job for any reason could also pull money from it without incurring financial drawbacks. But under the terms of the CARES (Coronavirus Aid, Relief, and Economic Security) Act, eligible parties can withdraw up to $100,000 from individual retirement accounts or 401(k)s sans penalty, so long as any money disbursed is paid back within 3 years.
Why It Pays Not To Remove Retirement Funds Early
Tempting as the prospect sounds, remember that removing funds from a retirement account while their value is depressed not only provides less return for every investment, but also inhibits growth potential when markets bounce back. While early penalties for withdrawing money are also temporarily waived, if you choose to take money out of your retirement account, you’ll also still owe income tax at some point on withdrawals. The more money that you’re able to keep in your retirement accounts, even during times of crisis, the longer this money will have to grow going forward and the harder it will work to help ensure your long-term success. Similarly, the more money that you remove from these accounts now, the likelier you are to receive lower payments in the future, including during your twilight years, when you’re likelier to experience financial shortfalls as well.
Other Sources Of Funding Can Help You Make Up For Shortfalls
Do note that individuals who require immediate access to funds have other options that they can turn to for financial relief as well.