In part 2 of Assessing Retirement Funds According to the CARES Act we discussed 401(k) Loans versus 401(k) Distributions if you are impacted by the coronavirus and what happens if you take a withdrawal vs a loan and what the bottom line is. Part 3 below talks about considering a coronavirus-related distribution.
Still considering a coronavirus-related distribution?
Using cash from a retirement account should always be a last resort, but there are a few reasons or scenarios for a distribution when, under the new rules, it could make sense to withdraw early.
To avoid high-interest debt. If you’re considering paying for expenses using a high-interest credit card or personal loan, using cash from retirement accounts may be a better option (depending on your credit and interest rate). You’ll have three years to pay yourself back, interest-free, compared to paying down high-interest credit card debt or a loan.
To avoid a housing problem. If your bank or landlord hasn’t put any rent or mortgage relief plans in place, it could be advantageous to continue paying these with retirement funds if you’re at risk of eviction or foreclosure and have no other savings.
To meet other basic needs. If you don’t have an emergency fund in a non-retirement savings account, it may make sense to tap into retirement accounts to pay for medical emergencies, prescriptions, essential food and hygiene items for you and your family, or elder care.
If you do decide to withdraw, the key to minimizing the downside is to only take out what’s absolutely necessary and pay back the amount within three to five years — though the sooner you can pay it back, the better. You can also consider some of the options below:
Emergency Fund
You have this fund for a reason. Consider using it now if you are in a bind. Consider growing it too. Now is the time to cut extra expenses and put more toward your savings for future uncertainties.
Personal Loans
Personal loans often provide better terms and interest rates than credit cards, especially to people with good credit. If a small personal loan can hold you over in a pinch, it may be a better alternative. Of course if you are struggling and are unsure where to start, a certified nonprofit credit counselor can help you sort through your options and provide financial guidance that can set you up for success, now and in the long-term.
The bottom line is if you are impacted by the coronavirus you can take from either 401(k) loans or distributions but you need to know the consequences of each one. You will be taxed on the withdrawals but if you can pay it back within 3 to 5 years depending on which one you choose you can then claim a refund on those taxes if you pay it up in the timeframe allowed. Also, keep in mind, you need to consult with your employer on plan specifics before you decide what to do.
These are not normal times. Anticipating what to do is a difficult decision. While taking money out of such an account before retiring is generally something financial advisors say to avoid, it may make sense for those who have been impacted by the crisis, including the millions of Americans who are unemployed, struggling to pay bills and cover basic expenses.
