What Should I Know About Early 401K Withdrawal?

Do you find yourself becoming tempted to cash out or take an early 401K withdrawal during the uncertain times we are currently facing?  The new CARES Act may help provide some relief for many American families and small businesses who choose early 401K withdrawal.  But should you do it?  

What if you just need more cash flow right NOW?

Even if you have not been impacted by the coronavirus pandemic, there are still some exceptions that would allow you to take early withdrawal without the 10% penalty.  Considerations to this would be life events or qualifying hardship such as buying your first home, divorce, permanent disability, excessive medical expenses, and many more.  Experts say this should be a last resort.

What does the CARES Act offer?

The CARES Act allows you to take money out of your 401(k) or IRA without some of the strict penalties, for a limited time.  This is intended to provide relief for those affected by the coronavirus pandemic.  If you are under the age of 59 ½, you can take up to $100,000 in coronavirus-related early distributions from your 401(k) plans without facing the 10% early withdrawal penalty, if you meet certain conditions. You may also have up to 3 years to pay the taxes on the withdrawal under the CARES Act.  This takes away some of the downsides of early deductions from your 401(k).  However, Fortune.com says that many financial advisors are giving mixed reviews on this, so there is a lot to consider. 

What are the consequences of early 401(k) withdrawal?

For those of us who cannot wait until we turn 59 1/2 to withdraw from our 401(k), it’s important to understand the penalties that can apply. There is no way to predict our life expectancy or what other life events may impact us financially in the future.  It can be difficult to put enough money into your retirement plan to retire off of.  If you take out those funds early, you may miss out on the potential gains you would have if you left it in the account.  What if you have a series of unfortunate events and find yourself unable to play catch-up in your retirement goals?

It’s all about time and compound growth.

Picture saving for retirement like growing a tree.  You plant a little seedling and wait years, even decades for it to mature to its full height and girth.  Depleting your 401(k) is like uprooting the tree before it reaches its prime, possibly damaging or killing it in the process.  Then you have to start all over again and plant another seed.  This time the tree grows slower and less fruitful.  Forbearance on Your Home Mortgage is also something to do your research on before making any decisions due to future consequence.

Consider other alternatives.

Now that we took a look at the pros and cons of withdrawing from your 401(k) in the uncertainties that 2020 has brought us, let’s consider other ways to bring financial relief.  Aside from tapping into your savings, another big source of relief can come from your house, if you are a homeowner.  Home Equity Loans and Home Equity Line of Credit (HELOC) options are abundant right now.  If your credit is otherwise in good standing, you can get low rates on these types of products.

Don’t own a home or have enough paid into your mortgage?  Do your research!  There are many types of COVID-10 relief funds, debt consolidation programs, refinancing, rebates, you name it!  In other words, you have options. 

There is hope and there are options during these times of uncertainty. For other articles on finances, visit Torelli Properties.

Contributing author: Melissa Momcilovich

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