Should I Tap into My Retirement?

The CARES Act eased penalties on retirement withdrawals and allows Americans to withdraw up to $100,000 from their retirement accounts due to coronavirus hardships without incurring a 10% penalty (which was mandatory for people under age 59 ½). This might be appealing, but the cost to consider in withdrawing from your 401(k) is the future growth you are losing on the dollars you extract now. It is not just the taxes you’re going to have to pay – you could really be hurting yourself in the long term if you’re not careful. For example, if you withdraw the full $100,000 the CARES Act permits at the age of 40, your own retirement account balance would be almost a half-million dollars smaller at age 65 than if you had left the money in your account (assuming an average 7% annual return).


That’s why tapping into your retirement accounts, be it a 401(k) or an IRA, should be a last resort. You’ll want to consider exhausting these options first:

• Reach out to lenders to see if they are offering payment extensions. You will have to make these payments eventually, but this will buy you some time.
• See if you can get a 0% or low interest rate on a credit card.
• Look into our low-cost personal loan or consider a home equity line of credit to help you weather the crisis.

If these options are not enough to get you by, here is what you should know about withdrawing from your retirement accounts:

• Try to make a plan to put it back. The CARES Act allows you to return the money to your 401(k) within three years without affecting the eligibility for future contributions. If you can do that, you also won’t owe taxes on the distribution and you’ll eliminate most of the long-term damage associated with the early withdrawal.
• Under the Cares Act, the 10% penalty is waived for distributions up to $100,000.
• You will need to file amended tax returns in order to take advantage of the tax relief on the distribution as well as the 10% penalty waiver.
• The waiver only covers withdrawals made in 2020. Hardship withdrawals are not subject to the usual federal requirement that 20 percent of withdrawn retirement funds be withheld to cover taxes. Instead, individuals have up to three years to pay those taxes.
• The Cares Act has waived the rule that limits retirement plan participants to borrow no more than 50 percent of their fully vested balance or $50,000, whichever sum is less.
• The CARES Act suspends RMDs from IRAs and defined contribution plans (other than Section 457 plans for nongovernmental tax-exempt organizations) for 2020. This waiver includes any RMDs for 2019 with an April 1, 2020, required beginning date that were not taken in 2019. This one-year suspension does not generally affect how post-2020 RMDs are determined.
• Situations covered under the Cares Act include, but are not limited to, being unable to work for lack of child care, having to close your business or reduce your hours of operation, and/or having your self-employment income reduced.

We understand this is a stressful time and it’s hard to know if you’re making the right decisions. Fortunately you’re not alone. Please contact us if there’s anything we can do to help you get through this difficult time.