One of the more popular provisions of the massive coronavirus relief packages passed by Congress this year allows Americans to take an early payout from their 401(k)s without tax penalties, but economic experts are warning consumers not to reach for their retirement savings to make ends meet, not even in these desperate times.
Taking a payment from a retirement account before age 59½ typically places a 10% or higher tax assessment plus an equal penalty on top of whatever amount of money is being withdrawn. An early payout also counts toward income and often results in a larger tax bill at the end of the year. However, the $2 trillion CARES Act that Congress passed in March and the $900 billion stimulus bill passed Monday allows anyone to take up to $100,000 through a loan or withdrawal without any tax penalty.
President Donald Trump has designated all 50 states major disaster areas amid the coronavirus pandemic, meaning every U.S. citizen is eligible to take advantage of the provision.
Despite gaining some immediate financial relief, many who dip into their retirement accounts ultimately find themselves on “an exit ramp to eternal financial sadness,” according to Paul Ruedi, a retirement planner in Illinois, who spoke exclusively to CBS News.
Ruedi emphasized that taking retirement money should always be an option of last resort, but if it was necessary, that borrowing would be better than withdrawing because the money is paid back over time.
“If you took out $100,000 from your account during the end of March this year, you would have missed the 66.88% gain in the broad stock market,” he said. “That’s a loss of opportunity of $66,880 that you never get back.”
Michael Reese, a Texas-based certified financial planner, said those planning to take money out early should consider long-term consequences.
“Most people who take out a distribution aren’t going to put it back and that’s gonna damage their long-term financial health,” Reese told CBS. “To go in there now is just crippling you. You’ll cost yourself another 5 or 10 years of work because you took out that $100,000.”
A consistent number of workers have taken money from retirement accounts in years before the pandemic, even with the tax penalties that add up to losses that may be impossible to recover.
A recent survey by Transamerica Center for Retirement Studies finds that 33% of Americans who work full-time planned to take an early retirement withdrawal this year, which is nearly the same number of withdrawals taken in 2019.
The number of 401(k) withdrawals this year amount to “a ripple and not a wave” because individuals in the hardest hit sector of the economy — service industry employees — don’t typically receive retirement benefits, according to Monique Morrissey, an economist with the Economic Policy Institute.
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