As the country begins to re-open the economy the effect of the shutdown due to the COVID-19 pandemic will be felt for some time. Millions of Americans have lost their jobs at least temporarily, and a recent survey showed that about twenty percent of Americans plan to withdraw money from their retirement accounts during this time.
Normally, tapping into a 401(k) or IRA prior to age 59 1/2 would result in a 10% penalty on the amount you take out. But thanks to the CARES Act that was passed by Congress in March you can now withdraw up to $100,000 without penalty from a retirement plan if you can show that you have been negatively impacted by the pandemic. But taking an early retirement plan withdrawal is a bad idea for three big reasons.
- Most retirement plan values are down because of the pandemic’s negative impact on the stock market earlier this year. If you take a withdrawal now you will have realized those losses, whereas if you leave your account alone and wait for the market to recover, you may get it all back and then some.
- You may need cash now but think about what your financial circumstances might look like when you are older and haven’t worked in years. Chances are you will need all the money you can get, and the more you remove from your 401(k) or IRA today, the less that you will have access to then.
- If you take a retirement plan withdrawal today you will lose out on whatever growth that money could have achieved. Assuming a seven percent average rate of return annually over a long period of time could result in a lot of money being lost.
If you have no choice then you are better off withdrawing from your 401(k) or IRA than racking up expensive debt like from credit cards. But if you can avoid an early withdrawal during this difficult time, you’ll be better off later in life.