Here’s What You Need to Know
The sudden downturn in the market has left many people out of work, which can cause people to make drastic and emotional financial decisions. You might be looking at your options and wondering how you will survive these difficult times. You might even be thinking about tapping into your savings, including your 401(k). But before you think about digging into your retirement nest egg, there are some things you need to know before you make a decision.
Starting with the Facts
While the money in your 401(k) is meant to be withdrawn when you’re older (typically 59.5 or later), the new CARES act allows for some retirement plan participants to take distributions up to $100k.
You can put this money back into the account over a three-year period without paying a penalty or experiencing any tax ramifications. However, if you aren’t able to replace those funds within the allotted time frame, taxes will still be owed, but it can be paid back and effectively prorated over the next three years. Please reach out to your tax advisor for additional clarity and advice.
Don’t sell at the Bottom!
The market is down 20-25% from where we were in February. So, taking an early distribution from your 401(k) means you will be selling at today’s price point and locking in paper losses from the highs. At some point the market will recover and if you’ve liquidated some or all of these funds they will no longer be invested and experience this growth.
The money in your 401(k) is your nest egg, and you don’t want to tap into it if you don’t have to. So just because you can, doesn’t mean you should.
Don’t Forget About Your Retirement Goals
Taking an early distribution on your 401(k) could keep you from reaching your retirement goals, so you need to run through the numbers before you do anything. You may have to work longer than you originally planned, so be extremely careful before you implement this strategy.
It Should be a Last Resort
You don’t want to take an early distribution on your 401(k) unless you have to, and the money should only be used for basic needs. Period, end of story! Many companies are willing to help, so let them know what’s going on. And don’t forget about cutting expenses or refinancing debt. Many people have also gotten their stimulus funds, which you want to use wisely. Most importantly, know your options!
So, when should someone take a distribution?
The decision to take an early distribution on a 401(k) should be looked at on a case-by-case basis. You should only withdraw from these accounts if you need help with basic needs or to avoid a housing problem (such as an eviction or foreclosure), but you only want to take what is absolutely necessary and pay it back as soon as possible.