Making withdrawals from retirement accounts comes with consequences.
COVID-19 has triggered an economic downturn.
As stock values have dropped, people have lost chunks of their nest eggs.
Depending on their careers, their earned income may have fallen or disappeared.
Making withdrawals from 401(k)s or IRAs may seem like the best option.
According to a recent CNBC article titled “Tapping Your 401(k): Is now the right time to do it?,” this may or may not be true for you.
If you have run out of emergency cash, your only option may be to take a loan from your 401(k) or IRA.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act makes this relatively easy to do.
It increases the previous loan limit of $50,000 to $100,000 for withdrawals from your 401(k).
Typically, guidelines for borrowing from a 401(k) require repayment within five years, but are specifically defined within the terms of your 401(k) plan.
If your loan repayment was originally due in 2020, you will be able to delay it for another year from the date the loan was taken.
What will happen if you do not repay the loan in the allotted time when making withdrawals?
The amount you borrowed will be taxed as a withdrawal.
In addition to the tax, you will also be subject to a 10 percent penalty for early withdrawals.
If you borrow money from an employer 401(k) and leave your job, you will likely need to repay the loan in a short amount of time.
If you do not, your plan balance will decrease according to the amount borrowed and it will be taxed as a distribution.
There are obviously risks to borrowing money from a 401(k).
When making withdrawals, you will need to determine what will be best for your financial security now and in retirement.
Although you will avoid paying around 11 percent interest on a personal loan, you may be placing your retirement at risk.
Look before you leap.
Reference: CNBC (April 20, 2020) “Tapping Your 401(k): Is now the right time to do it?”