Key Takeaways
- The CARES Act allows for retirement fund withdrawals with no 10% penalty.
- Recent statistics show that 50% of Americans are considering withdrawing funds from their 401(k) plans.
- There are long-term consequences to withdrawing money from your retirement account, and you need to be aware of what they are.
Wouldn’t it be nice if life came with an operations manual? It’s be especially nice if there were chapters devoted to Things to Watch Out For and Don’t Do These Things. Included in those chapters, there might be a section regarding retirement savings withdrawals and the CARES Act.
The CARES Act, passed in March of 2020, allows for retirement account withdrawals with no 10% penalty (which is the usual penalty for withdrawals before you reach age 59 ½). People who take advantage of this are given three years to pay the money back. On the face of things, it seems like a pretty good deal.
However, if this is something you’re considering, there are some important things to know beforehand. First, don’t forget that you’ll be paying the money back with after-tax dollars. In other words, if you withdrew $10,000, you’ll likely need to earn $13,000 to $14,000 to pay that $10,000 back. And if you can’t pay it back, you’ll have to pay tax on the $10,000.
Second, you need to know how this will affect your taxes. The tax code is progressive – as you earn more money, you pay in a higher tax bracket. If the $10,000 moves you into a higher tax bracket, you’ll be paying more in taxes.
Third, ask yourself if you have a three-year plan in place. While you may need the money right now, have you considered how you’re going to pay it back over three years? It’s important to always ask yourself “What’s next?” when you’re about to make a major decision. Make sure you have a plan in place to pay the money back.
Unfortunately, we know that most retirement plans are underfunded. And statistics in May showed that 50% of those with 401(k) plans are considering pulling money out of their plans. That’s a huge number, and it’s likely that many of them aren’t considering the long-term consequences.
So if you’re thinking of doing this, make sure to give it some deep thought before doing so. While it’s well-intentioned and meant to help those who are struggling during the COVID-19 pandemic, if you don’t really need it, take a pass on this one. Until next time, enjoy.
