Should you take money out of your 401K during COVID-19 hardships?

If you have been impacted by the coronavirus pandemic, the strict rules about taking money out of your 401K early have been temporarily lifted.

Financial experts say that may sound great, but taking from your 401K should only be done if absolutely necessary.

Under the CARES Act, investors can take out a "coronavirus-related distribution" without paying the usual early withdrawal penalties.

"The best parts about this change are that typically, when someone has not reached the age of 59 and a half, if they take that money out, there is a 10 percent tax penalty right off the bat. And then in addition to that, they'll pay income tax on those monies taken out," Edward Jones financial adviser Simon Tanner said. "In this instance, that income tax will be spread out over three years."

Your company's plan sponsor will determine:
  • If you meet the criteria to take money out
  • If the amount you are asking to withdrawal fits the hardship you are facing

What makes this different from a loan is that it does not need to be paid back.

Employees may take up to three years to pay the amount back, or not.

But even if you don't pay it back, you still owe the income tax on it within the three years.
Tanner says if this is something you are considering, only touch your 401K as a last resort.

"Often I ask the question, 'How long did it take you to save that amount of money that you are thinking about taking out?' Because, it may take you that amount of time to replace it," Tanner said.

Under the CARES act, if you are furloughed, or your hours are cut back, Tanner says you should still contribute to your 401K if you are getting a paycheck.

The contributions would automatically stop if your paychecks stop since they are salary based.

"If they are taking out $50,000 or $100,000, they are going to set themselves back by that same amount. So when we are looking at retirement goals, it's all about achieving those goals and getting back to those goals so there will be a dramatic impact on those savings goals," Tanner said.

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