Things to consider before you withdraw

We know many questions are running through your head during this time, especially when you need fast cash. Before you pull from your 401(k), consider withdrawing money from other accounts you may have. Most of the time, anyone who withdraws from their 401(k) before they reach 59 ½ will have to pay a 10% penalty as well as their regular income tax; however, under the CARES Act, Americans can now prematurely withdraw money from their 401(k) without penalty provided they are eligible to withdraw and have been impacted by COVID-19 in the following ways:

• You, your spouse or dependent has been diagnosed with COVID-19 

• You’ve experienced financial hardship because of being quarantined, furloughed, laid off or because your work hours have been cut. 

• You are unable to work due to lack of child care 

• You are a business owner who has had to close or reduce hours of operation due to COVID-19

If you have been affected by COVID-19 and meet the criteria above, consider other options to tap into before withdrawing from your 401(k) such as: a Certificate of Deposit (CD), claiming unemployment benefits, utilizing your rainy day fund in your savings account or using your government stimulus check.

If your financial hardship is temporary and you’re expecting to get back to work, you can also consider a credit card to pay for necessities. Consider if you’re able to pay the balance in full on the credit card though. Another option is to take out a personal loan provided that you get a good rate.

While you will not face a penalty by withdrawing early, you will have to pay taxes on the withdrawal which can be paid over a three year period.

If you’re unsure about withdrawing against your 401(k) you can also take a loan from your 401(k). Under the CARES Act, you can borrow 100% of your vested account or $100,000, whichever is less. Like all loans, there are pros and cons. If you do decide to take out a loan and either leave your job or do not repay the loan, it could be subject to income tax and the early withdrawal penalty.

If you’ve exhausted all financial options, we can’t tell you whether you should or shouldn’t take money out of your retirement plan but we do ask you to consider your options carefully and make a plan before borrowing or withdrawing money.