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Making Ends Meet: What to Consider if you Tap Into Your 401K

Posted at 6:53 AM, May 06, 2020
and last updated 2020-05-06 06:53:34-04

LANSING, Mich. — Many Americans are dealing with the financial hardships right now. A change provided by the CARES Act allows people to tap into their 401Ks early. Alicia Nieves is looking at what you need to consider before you make this move.

When congress passed the CARES Act it approved billions of dollars in direct stimulus checks billions more in business loans but it also approved a provision that would allow people to tap into their retirement fund penalty free.

“The important thing with the CARES Act is that it gave Americans some additional options. It gave employers some additional ways to help their workforce get through this tough time.” Nevin Adams is with Plan Sponsor Council of America (PSCA), a non-profit trade association that surveyed 401k plan sponsors after the CARES Act was passed.

PSCA found less than half of Plan sponsors were moving forward with implementing the legislative change… though some were still deciding. It’s important to note while congress passed the provision, plan sponsors had the option to implement it or not.

“The larger you were as a plan sponsor the more likely you were that you decided that you were going to take some action. Those who were taking some action decided they were adding these new distribution and loan options.”“What were some of the reason behind why some plan sponsors, didn’t want to implement this legislation?”

“They’re concerned about giving people all this ready access to this retirement savings a little too soon, and wanting them to take advantage of other options if they got them available.

“There is also a concern, if you think about what is going on in the markets, that for participants to be running in and pulling money out of that retirement savings at this particular time they would take that loss.”One of the fundamentals of investing, is buying low and selling high. Right now, pulling from your retirement would be doing the opposite of that. But for some, it’s been necessary.

“The good news is at a high level, even though there has been an increase in those volumes anecdotally people are not going crazy about it and I think that is a very good sign.”

Most financial advisors say you should avoid tapping into your 401k, unless you absolutely have to. If you do though, and your plan sponsor allows it. The normal 10% penalty is waived and taxes can be spread out over the next three years. There is a cap though, at $100,000.

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