Taking money out of your retirement account is very tempting when thinking short-term. Having some extra cash in your pocket would make life much easier during difficult financial times like those we are experiencing today. But, experts recommend not doing this unless you have absolutely no other choice.
Why Your Retirement Account Should Remain Untouched
While the CARES Act passed by Congress this past March removes many of the obstacles to withdrawing or borrowing from a retirement account, financial experts say there are several reasons why you should leave your money right where it is.
- The value of most retirement plans is down due to COVID-19’s brutal hit to the stock market. If you withdraw money now, you’ll be locking in your losses. But if you can wait it out, you might not lose anything.
- If you take money out now, you’ll have less for retirement, when you’ll really need it.
- You’ll miss out on investment growth. You could lose $100,00 or more, and that’s nothing to sneeze at.
- You’ll have to pay taxes on your withdrawal. Although you’ll have three years to pay the tax, that’s still just one more expense to worry about when you have very little money, to begin with.
Should You Loan Yourself Money?
A better option might be to borrow money from your retirement account.
But, Kelly Campbell, CEO of Campbell Wealth Management, warned on CBS News MoneyWatch, be prepared to repay it within a year.
The sooner you pay the money back, she told MoneyWatch, the more time it will have to grow as the stock market rebounds.
Alternatives To Dipping Into Your Retirement Account
Writing for The Motley Fool, Maurie Backman suggests leaving your retirement account alone and applying for a more affordable home equity loan, trying to negotiate reduced or deferred payments with your creditors or tracking down a side hustle that you can do online. Beware though. Depending on the field you’re in, some of those side hustles pay very little.
The one option to avoid, Backman says, is running up expensive credit card debt.
If you’re still thinking of withdrawing money from your 401(k), you’re not alone. In a May SimplyWise Retirement Confidence Index, one out of five people said they expect to tap into their retirement accounts now.