Emergency Withdrawals Are Allowed, But Are They a Good Idea?

In light of the coronavirus outbreak, the rules on early withdrawals or loans from your 401(k) have been relaxed. The idea is to help those who have been negatively impacted by the outbreak, but are early withdrawals or loans a good idea?

First, let’s take a look at the relaxed rules:

• You can withdraw up to $100,000 to use for expenses created by the crisis
• The limit for 401(k) loans is 100 percent of your vested account balance, up to $100,000
• The income tax due on your withdrawal can be spread over a three-year period, meaning you don’t have to pay all of the taxes at once (Spring of 2021)
• You have three years to replace the funds in the account, if you choose to do so

Who can take advantage of these relaxed rules? If you’ve been furloughed, laid off, or quarantined due to the outbreak, or your spouse was impacted in this way, you are eligible. Also, those who cannot work due to a childcare conflict, or who are working reduced hours due to lack of childcare, qualify for a special withdrawal or loan.

Additionally, those who test positive for covid-19, or who have a dependent who tests positive, can qualify for emergency withdrawals.

But should you? That is the most important question. Remember that withdrawing funds from your retirement account will mean losing months or years of interest that you can’t really regain. Before you jump at the opportunity to ease your financial strain this way, take the following steps:

• Reduce expenses any way you can
• Contact creditors about your situation, and request grace periods
• Call your mortgage company and ask about deferring payments during this time (most are allowing this, if you specifically mention hardships due to the outbreak)
• Consider other tapping other assets first

It is always best to avoid early withdrawals or loans from retirement accounts whenever possible. If you have questions about financial planning during this difficult time, call us first before making any rash decisions. Hopefully we can help you identify alternate options, so that you can leave your retirement account intact.