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Coronavirus: When you should withdraw from your 401(k)

Dhara Singh
·Reporter
·4 min read

As millions of workers find themselves unemployed or with reduced hours, many Americans may consider taking money from their 401(k) accounts to stay afloat, especially since withdrawal penalties have been recently relaxed.

“While our family and friends are waiting for their stimulus checks, people still need to make ends meet,” said Jay Spector, a partner at Barton Spector Wealth Strategies. “Investors may look to take a withdrawal from their 401k plan if they lose their job or if they need additional funds to make it through this difficult time in our country’s history.”

If you’re furloughed or lost a job

Take out funds from your 401(k) only if you have lost your job and your emergency savings have been depleted, according to financial experts.

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“You should only take the money from retirement funds in extreme circumstances,” said Aaron Clarke, wealth advisor at Halpern Financial. “If this is the case, then of course you shouldn’t suffer in the interim until your employment, or financial situation, changes.”

Read more: 401k plan and how it works: The full breakdown

Under the recent CARES Act, you can withdraw up to $100,000 from your 401(k) without paying the 10% penalty as long as it’s coronavirus-related withdrawal. Previously, if you were under 59 ½ you would have had to pay this penalty by the next tax period.

Income taxes on early withdrawals can now be spread over the next three years, under the new law. But if you pay back the entire amount you withdrew within the next three years, then you’re excused from these taxes altogether.

West Lawn, PA - April 8: Wayne Lubas is a ballpark/stadium/arena vendor who works games in Reading, Philadelphia, Baltimore and Washington and is out of work because of the coronavirus pandemic. He is at home Wednesday, April 8, 2020, instead of at a season opener. (Photo by Bill Uhrich/MediaNews Group/Reading Eagle via Getty Images)
West Lawn, PA: Wayne Lubas is a ballpark/stadium/arena vendor who works games in Reading, Philadelphia, Baltimore and Washington and is out of work because of the coronavirus pandemic. He is at home on April 8 instead of at a season opener. (Photo: Bill Uhrich/MediaNews Group/Reading Eagle via Getty Images)

If you haven’t lost your job

If you haven’t lost your job, take other steps first, such as lowering debt payments to free up cash flow.

“Ask: ‘Is this really a hardship? Or are there other venues I haven’t utilized or considered to increase cash-flow,’” said Michelle Buonincontri, certified financial planner at the firm Being Mindful in Divorce. This could include making special arrangements with credit card companies, auto loans and mortgages to defer payments.

Read more: Coronavirus: What banks, lenders, utilities and more are doing to help customers financially

If you have a federally backed mortgage, the recent CARES Act allows you to request a forbearance period of up to 180 days for a coronavirus-related hardship. You can then also request an additional 180 days if needed. In addition, borrowers will not accrue any late penalties, interest, or fees during this time. Those with student loans are allowed until Sept. 30 to defer their payments.

Buonincontri said one of her clients who was short $1,600 to meet his obligations after his spouse was recently laid off. By talking to his lenders, he was able to defer payments on his student loan and personal loan and also refinance his mortgage.

Minneapolis, MN April 8: Tenant right advocates including Nathan Sirdar organized a honking, vehicle protest around the US Bank building. (Photo by Richard Tsong-Taatarii/Star Tribune via Getty Images)
Minneapolis, MN: Tenant right advocates including Nathan Sirdar organized a honking, vehicle protest around the US Bank building. (Photo: Richard Tsong-Taatarii/Star Tribune via Getty Images)

“The latter added almost $400 to his cash flow, and the former will make up for the next two to three months,” Buonincontri said.

Consider a HELOC

Another option for consumers who need funds but remain employed is to consider a home equity line of credit (HELOC). This allows you to take a loan against the equity built up in your home to pay off higher-interest debt or secure a cash reserve.

“HELOCS are set up in different ways, and in this environment, you may be able to request flexible payment options,” said Diane Pearson, advisor at Pearson Financial Planning. “You may be able to only pay back interest right now.”

Read more: The difference between a HELOC and a second mortgage

HELOCs also typically have rates that are lower than on other loans or credit cards. The downside remains that if you don’t pay the HELOC back under the terms of your lender, you could lose your home.

“At the end of the day, as a financial planner, I want to see investors use their 401(k) plan as a source of last resort,” Spector said. “In either case, a premature withdrawal loan from the 401(k) plan will cause more long-term damage to one’s retirement goals.”

Dhara Singh is a reporter at Cashay and Yahoo Money. Follow her on Twitter at @Dsinghx.

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