November 16, 2020
By Rahul Iyer
The CARES Act changed many things for Americans to make their lives easier financially, including the ability to withdraw from their 401K.
While it may be easier, aka less expensive, should you?
Probably not. Here’s why.
Even if you think it’s ‘only $10,000’ you would withdraw, that’s a lot of money in the grand scheme of things. You aren’t just withdrawing $10,000. You are removing the chance for that $10,000 to grow into something much greater over the years. Every day the money isn’t in your account is an opportunity cost.
If you’re trying to bail out of your 401K now, when the market is down, you may sell at a loss. Now not only are you taking money out of your retirement, but you’re selling at a loss. In other words, you’re locking in a loss.
If you kept the money in your 401K and rode out the storm, you may see a comeback. When you pull out, there is no comeback, only a loss and it’s not a good feeling.
The only thing the CARE Act stops is the 10% penalty you’d pay for early withdrawal of your 401K funds. If you withdraw the full $10,000, it would save you $1,000. But, come April 15th next year, you’ll owe the taxes on the $10,000 you withdrew.
It’s best to take the taxes out now, so you have the money available when it’s due, otherwise, you may put yourself in a sticky financial situation in a few months.
It’s easy to jump at the first option you see and right now all eyes are on 401Ks because of the CARE Act. But there are other options.
Ask yourself if you’ve exhausted all other options including:
0% APR credit cards
A loan from family or friends
If any of the alternative options won’t work and you think you’ll be in a bind, any of the following reasons are reason enough to tap into your 401K:
You can’t afford your mortgage due to being laid off or falling ill due to COVID
You can’t meet your basic needs
Your only options are high-interest loans or debts that would be unaffordable
Think long and hard before withdrawing from your 401K. It may seem smart at the time but think of your future. What will happen if you take out that $10,000?
It may not seem like much now but think of the opportunity cost. How much interest and compounded interest will you lose? How will that hurt your retirement timeline and goals? $10,000 is a lot in the grand scheme of things because every dollar you save today is worth a lot more 10, 20, or 30 years from now.