Many Americans have been forced to take drastic financial measures to make ends meet during the COVID-19 pandemic. Unfortunately, for a surprisingly large amount of people, those drastic measures included tapping into retirement savings.
A new survey by Kiplinger found 30% of older American workers have either withdrawn or borrowed against their IRA or 401(k) in the past year.
In March 2020, the CARES Act allowed Americans to borrow up to $100,000 from their retirement accounts. The good news for these Americans is that they have up to three years to replace that borrowed money without taxes or penalties. In the past year, the majority of those surveyed who took out such loans did so aggressively, borrowing more than $50,000.
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Don’t Panic: Clark Kendall, president of Kendall Capital, recently said that if you’re one of the thousands of Americans that borrowed a significant amount of money from your retirement account, there’s no reason to panic at this point. However, keep in mind that you will be hit hard by taxes and penalties if you don’t repay the loan within three years, so make repayment a priority as soon as it’s financially viable given your personal situation.
For Americans who need money, but haven’t yet turned to their retirement accounts, Kendall said they should consider that route an absolute last resort.
“Exhaust other resources, such as emergency funds or other easily accessible forms of savings, before tapping retirement accounts,” he said.
Know Your Options: Going the loan route is much more attractive at this point considering any withdrawals by Americans younger than 59.5 years of age will be hit with a 10% early withdrawal penalty. Those withdrawals will also be taxed as ordinary income, making them subject to the typical income tax rate as well.
For anyone in an extreme short-term money crunch, there is an exception to the rule allowing people with an IRA to withdraw money without penalty as long as it is returned within 60 days.
Before taking any drastic measures, Kendall said Americans should make sure they fully understand all their financial options and the potential consequences associated with each.
“Factors such as age, family status, pension or no pension, spousal income, etc., affect these options — so coordinating with a financial advisor before making such moves remains wise,” he said.
Benzinga’s Take: Another option that might be more appropriate for many homeowners, rather than tapping into a retirement account, is a home equity line of credit. Retirement savings are the ultimate next egg, so borrowing against your house could potentially help you avoid losing peace of mind about your future.
(Photo by Jorge Flores on Unsplash)
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