COVID-19 Retirement Withdrawls. A Good Idea?

COVID-19 RETIREMENT WITHDRAWALS
Now under normal circumstances, being unemployed is not considered a valid reason to take an early retirement plan withdrawal, and tapping an IRA or 401(k) prior to age 59-1/2 in that scenario would usually trigger a 10% federal penalty on the sum removed.  Now don’t forget about the states too… they also have an early distribution penalty, and you get to pay income taxes on the money.

What's changed is that savers who have been negatively impacted by the COVID-19 crisis can now remove up to $100,000 from an IRA or 401(k) without facing that 10% early withdrawal penalty. This includes people who test positive for COVID-19, as well as those who are out of work due to being laid off, furloughed, or quarantined.  It also includes people who are unable to work due to lack of childcare or business owners who can’t operate right now.  Furthermore, those who withdraw funds from a traditional IRA or 401(k) will still be liable for taxes on the sum they remove, but those taxes won't be due immediately -- they can be spread out over a three-year period.

All told, these changes make early retirement plan withdrawals much easier to take, and much more appealing. But it's still better to avoid them right now if possible. Even in times of crisis, there may be a better option. When you're already at the breaking point, taking some  of your own long-term savings may seem easier than getting a loan or exploring other financing options. But before you withdraw a lump sum from your IRA or 401(k), remember a couple of things:

1. Right now's not the best time to take a retirement plan distribution. The stock market has taken a beating in recent weeks, and liquidating investments is a good way to lock in your losses -- losses you might otherwise recover from if you were to leave your retirement savings alone for a while.

2. The more money you withdraw ahead of retirement, the less you'll have during retirement, when you may need it even more. And to be clear, it's not just your principal withdrawal you'll be missing as a senior; you'll also lose out on growth on that sum. In other words, if you withdraw $20,000 today, and you're not planning to retire for another 30 years, you'll end up having lost out on roughly $152,000 if your investments in your retirement plan normally generate an average annual 7% return, which is a reasonable assumption for a portfolio that's heavily invested in stocks.
​
If you're without an income due to COVID-19 and are worried about paying bills in light of it, explore your options for relief before tapping your retirement plan early. Your mortgage lender, for example, may allow you to defer your payments temporarily while you're out of work, while your utility provider may give you extra time to pay your electric bill. These are just a couple of examples, but the point is that it pays to see what leeway you might get in terms of paying bills before rushing to raid your retirement plan. Though having that option is a good thing in theory, taking an early IRA or 401(k) withdrawal is a move that could end up hurting you big time down the line. Questions about this? Contact Kim Kelly today.