Try not to make early withdrawals from your retirement accounts

[ssba]

In light of a short-term though very real cash shortage you might be feeling due to pandemic-related shutdowns or furloughs, you may be tempted to dip into your retirement accounts.

On its face, this may seem like an easy fix. It is likely the largest pool of money you have and it may seem harmless to loan yourself some money from it to tide yourself over until this financial crisis passes.

We urge you to consider ramifications of this move carefully.

Every dollar you remove from your investment account decreases the potential earning power of that account. So, if you withdraw $50,000 from your 401(k), you not only reduce that account by that amount, you also lose the potential that $50,000 might yield (another $2,500 in a 5% market). That lost interest compounds year-over-year making your single withdrawal even more expensive over the long run.

It is true that you can avoid paying an early withdrawal fee temporarily because the Secure Act allows you to take as much as $100,000 from your retirement accounts without penalty, and to avoid paying taxes on the withdrawal if the money is put back in the account within three years. But, this is a temporary window and you can’t be sure you will have the means to replace the money in three years.

Also, if you are furloughed, laid off or otherwise unemployed, you are probably not contributing to your 401(k) or other employer sponsored retirement plan anymore and this is already reducing your future earning potential.

It is far better to review your personal budget and to cut back on spending temporarily. You can also negotiate with creditors, including your landlord, sell an item or two you are no longer using, or pick up a side gig you can do safely until you are called back to your full time job. 

If you’ve trimmed all the excess and still find yourself short of cash, you might consider refinancing your home. You may end up with a lower interest rate on your mortgage, which will save you money in the long run, and you can take out a little extra cash to help tide you over.

In any of these cases, we recommend seeing a financial advisor to look at your whole picture and make the decisions that are best for you. 

If, after careful review with a fiduciary, you still decide a withdrawal from your retirement plan is your best option, do it but be very diligent about paying that money back as soon as possible and definitely within the three-year window.

Eventually, the economy will get back on track and we want you to be in the best position to capitalize on it moving forward.

If you or anyone you know has questions about their retirement account, please feel free to contact us to set up an appointment.