Should I Withdraw Money from my 401k During COVID-19?
Expenses have remained high during COVID-19. Car and house payments are behind for many people who are facing reduced income. Should you withdraw money from your 401k during COVID-19? Generally, you should not withdraw from your 401k, but it may be wise for certain situations.
COVID-19 is an Economic Hardship that Allows 401k Withdraw
The IRS allows hardship withdraws from 401k in certain circumstances. COVID-19 will meet this circumstance most likely if you are facing serious problems with your paying for your housing. It will also qualify if you are attempting to repair your residence, paying down a large unexpected medical expense, or using it for most necessary school tuition expenses.
The COVID-19 pandemic has created economic hardship across for millions of people. According to the IRS, your withdraw must: 1) be due to an immediate and heavy financial need, 2) the withdrawal must be necessary to satisfy that need, and 3) you do not exceed the amount of the need (you must take as little as necessary). The IRS will likely be very lenient if you meet these requirements properly.
Make sure to talk to your 401k manager and a tax professional. Remember, normally you will still be required to pay normal taxes and a 10% penalty on the hardship amount. However, it appears that under the CARES Act, this 10% penalty will be waived for 2020. Also, it appears that you will be able to spread your tax liability for over 3 years.
Only Drain Your 401k as a Last Resort
Be very careful. Only drain your 401k as a last resort. Your 401k account is designed to provide low-taxed, consistent income during retirement. Many people may be tempted to take large distributions out of their 401k because the IRS provisions are so liberal right now. If at all possible, reduce expenses instead and seek new income sources. Even consider filing for bankruptcy or restructuring your debts. In the long run, you will save a large amount of money and not dip into your much-earned retirement savings. Your 401k is ready and available right now, but use it only as a last resort.
