Should You Tap Your 401(k) in Times of Crisis?
With the passing of the CARES Act, and in the wake of the coronavirus outbreak, many Americans are facing an unprecedented opportunity. They can withdraw or borrow up to $100,000 from their retirement accounts and not incur any penalties.
President Trump signed the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, on the evening of March 27. The bill was created to support small and big businesses, as well as all Americans, who are struggling financially from the coronavirus outbreak, business shutdowns, and stay-at-home orders that are ravaging the U.S. economy.
To help ease the financial strain caused by the coronavirus, the CARES Act is allowing Americans to dip into their retirement savings in two ways.
First, anyone younger than 60 years of age can take a distribution from their 401(k), up to $100,000, without paying the normal 10% penalty fee. Any individuals who take advantage of this opportunity will also have three years to pay the taxes associated with the withdrawal, rather than the typical one year.
Second, Americans with a 401(k) through their employer can also borrow up to $100,000, or 100% of your vested account balance. Previously, you could only borrow up to $50,000, or 50% of your vested account balance. But it's important to note that if you default on your loan, you'll incur the 10% early withdrawal penalty.
For anyone facing financial hardship right now, these are certainly attractive options. However, the question remains: Should you tap your 401(k) during times of crisis?
Consider this: While you might not be penalized for withdrawing from your 401(k), there's a good chance you're still taking a significant hit on your retirement savings if you take a distribution. The reality is that the S&P 500 has tanked 16% from its February all-time highs to April 14, 2020, even with the recent rally higher. Many individual stocks have taken even bigger hits. So, you'd be selling stocks from your 401(k) at sharply lower prices.
It's also worth mentioning that a withdrawal could seriously stunt the growth of your retirement account in the upcoming years—and inhibit the actual timing of your retirement.
Let's say you have $100,000 in your 401(k) right now. You withdraw $50,000 to support your current finances amidst the crisis, leaving $50,000 in your retirement account.
None of us have a crystal ball and we can't predict what the next 20 years will hold for the stock market. But, in a good stock market, the difference in value created over 20 years between a $100,000 retirement account and a $50,000 account is sizable. The added value could be the difference between retiring early or working several more years.
If you're facing financial hardship right now, we encourage you to weigh all your options before tapping into your retirement accounts.
At Nicollet Investment Management we are here to help. Give us a call if you have any questions about the CARES Act or how taking a withdrawal from your 401k will impact your portfolio.