The $ 900 billion stimulus bill thatallows workers to withdraw money from their 401 (k) without being hit with a tax penalty – a slight change to a rule passed in the Coronavirus Aid, Relief and Economic Security Act ( CARES) last March.
Anyone can withdraw up to $ 100,000 from their account – through a loan or withdrawal – as long as they live in an area where a major disaster has been declared, according to the. invoice. The provision excludes areas affected only by the COVID-19 disaster. The CARES Act gave Americans financially affected by the pandemic the option to opt out without penalty, but that exception ended in 2020.
But while withdrawing funds from a 401 (k), IRA, or other retirement account is currently penalty-free, financial planners say raid that account should be a last resort. The withdrawals will ultimately put someone on “an off ramp to eternal financial gloom,” said Paul Ruedi, an Illinois retirement planner.
“If you had withdrawn $ 100,000 from your account at the end of March of this year, you would have missed out on the 66.88% gain in the wider stock market,” he said. “It’s a lost opportunity of $ 66,880 that you never get back.”
Ruedi and other financial planners said workers should choose to borrow on 401 (k) instead of making a withdrawal. The borrowing option forces someone to repay the money over three years and have a chance to restore pre-pandemic balance, said Michael Reese, a certified financial planner based in Texas.
“Most people who take a distribution are not going to put it back and it’s going to hurt their long-term financial health,” said Reese, retirement specialist. “Going out there now paralyzes you. You’ll cost yourself another 5 or 10 years of work because you took that $ 100,000.”
Making an early withdrawal from a retirement account before age 59 1/2 is not a rare decision for Americans. One in three full-time workers, or 33%, have taken out or plan to withdraw money this year, according to one investigation from the Transamerica Center for Retirement Studies. This is about the same level of withdrawals as last year, according to survey data from the center.
Even before the pandemic, many workers had to dip into their retirement accounts to make ends meet, said Transamerica CEO Catherine Collinson. It will take years for these people to recoup these losses and many never recover, she added.
In a normal year, anyone under 59 1/2 who takes money from their 401 (k) would have 10% immediately given back by the IRS and that money would also be added to their annual income – meaning that he might see a bigger tax bill at the end of the year. Ruedi said households that have been financially stressed as a result of the pandemic are likely to withdraw from their retirement accounts even with the penalty, but the provision makes the decision a little less damaging.
Disposal without penaltyunder the CARES law and most likely will be the same under the current stimulus bill, said Monique Morrissey, an economist at the Economic Policy Institute. The nation has seen a “ripple, not a wave” of 401 (k) withdrawals because the cash-strapped Americans who would need the money – namely workers in the service industry – had jobs that weren’t there. ‘offered no retirement plans to begin with, she mentioned.