Why You Should Avoid Using Retirement Savings to Cover Bills in the Wake of the Coronavirus
If the COVID-19 pandemic has you strapped financially, you may be thinking about tapping into your retirement savings to cover your mortgage and other expenses. That could cost you a lot in the long-run. Your best bet is to avoid using your retirement savings if possible.
Changes in the Rules on Retirement Account Withdrawals
Ordinarily, you would have to pay a 10 percent penalty if you withdrew money from a retirement account before the age of 59 1/2, unless you qualified for an exception. The Coronavirus Aid, Relief, and Economic Security (CARES) Act that was passed recently allows people who have been impacted by COVID-19 to withdraw up to $100,000 from an IRA or 401(k) without paying a penalty. If your 401(k) allowed you to take a loan, you might be able to borrow up to $100,000. You would have to pay it back with interest within five years.
Reasons to Avoid Withdrawing Money From Your Retirement Account
Even though you might be able to withdraw money from an IRA or 401(k) to cover your current expenses, that could be a mistake. First of all, you would have to pay back the money within three years. If you failed to do so, and if you withdrew funds from a tax-deferred account, it would be considered a distribution and you would have to pay taxes on it.. With the economic uncertainty caused by the coronavirus, you might not be able to repay the withdrawal in time, which means you could face a large tax bill later.
If you took a loan from a 401(k) that you had through your employer and then you lost your job, you would have to pay it back in full much sooner than five years. That could make your financial situation even worse.
The longer your retirement savings are invested, the more they can grow. Withdrawing money would reduce the size of your portfolio. You might not have enough time to get the balance back up to where it was before you retired. Since the stock market is down, if you sold stocks in your portfolio now, you could get much less than what you paid when you bought them. The amount of money you would lose in long-term retirement savings could be a lot more than what you would get now to put toward your bills. You might struggle to make ends meet in retirement or be forced to retire later than you had planned.
Search for Other Ways to Make Ends Meet
If you are struggling financially and unemployment benefits and stimulus payments aren’t enough to cover your bills, look for ways to cut your expenses. You may also want to explore other sources of funds, such as a home equity line of credit or a personal loan, to avoid withdrawing money from a retirement account unless it’s absolutely necessary.