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Considering Withdrawing From Your 401k? Read This First.

Oct 27th, 2020 • Lisa W.

There is no way of predicting how long the economic consequences of COVID-19 will last for you. You may be eyeing your retirement accounts as a source of funds to get through this time. And there’s good news: The CARES Act included a provision to allow persons affected by COVID-19 to make a withdrawal from their retirement account without penalty.

Specifically, “qualified individuals” (or their spouse) can withdraw up to $100,000 from their workplace retirement account (401(k), 403(b), and similar) or Individual Retirement Account (IRA) without paying the usual 10% penalty. Also, while this distribution is still taxable as before, you can spread the tax payment over three years.

Great news, but is this wise?

It should not be your first option. First, take advantage of the programs out there designed to reduce your short-term stress…student loan repayment forbearance, mortgage forbearance, payment flexibility from utility companies, insurers, credit card issuers and other lenders. If you have emergency savings, lean there before your retirement account. Your retirement account is a last resort. Why? Because it is hard — very hard — to make up for the lost time. You’ll have to replace not only the actual amount that you withdrew, but also the earnings that would have accrued on that amount. A $10,000 withdrawal in your 30s could reduce the amount you have available for retirement by more than $76,000.

A cardinal rule of personal finance triage is to avoid actions to reduce short-term distress that have long-lasting consequences. Withdrawing money from your retirement account could be one of those decisions. Before you do, pause to consider if there is another choice that can meet your current need with fewer lasting effects. If not, plan for how you will “right the ship” when better times come.

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