America is almost certainly already in a deep recession. Major economic drivers including air travel, cruise lines, concerts, and conferences came to a halt weeks ago, cutting tens of billions of dollars in consumer spending out of the economy.

In the weeks since, other massive swaths of the economy have shut down. Factories across the country are closed. Retailers have closed. Many restaurants have shifted to take-out and delivery only, while millions more have been forced to close their doors entirely.

We saw the first clue of how bad things could get on March 26, when a record number of people -- almost 3.3 million -- filed for unemployment benefits. Congress acted quickly to provide relief, passing a $2 trillion economic aid package. But for many people, that won't be enough to make ends meet. Congress also added a provision allowing for people to access their retirement accounts early, without having to pay the usual penalty, with the caveat that those funds must be paid back.

Hands reaching up for a dollar bill

Image source: Getty Images.

Here's the thing: While a lot of people will have no choice but to tap their retirement savings early to make ends meet, it's possible that many others -- perhaps millions -- will cash out retirement savings early without a real need.

For people who don't absolutely need to take money out of their retirement accounts, doing it anyway -- particularly in the middle of a market crash -- could prove to be a massive mistake they'll pay for in the future.

Early withdrawals: What the law says you can do

In short, the new law waives the 10% early withdrawal penalty that you'd normally have to pay if you take money out of your 401(k) or IRA before turning 59 1/2 -- so long as you pay the money back to a retirement account within three years. Not only would you avoid the usual 10% penalty, but you also wouldn't have to claim the distribution as taxable income.

It's obviously not an ideal thing to allow people to tap their retirement savings before retirement, but these are unprecedented times, and the government is taking unprecedented steps to make sure people have access to money.

Here's why an early withdrawal could be a huge mistake

There are very good reasons to take an early withdrawal (and we'll get to those). But for many -- possibly most -- people who have retirement savings, it's best to take every step possible to avoid touching your retirement savings now.

Let's talk about the main reasons why.

Man hanging onto a piggy bank as another person reaches out for it

Image source: Getty Images.

1. It's not for now

Retirement savings are just that: What you are counting on to carry you through retirement, and pay for your needs when your ability to work will be diminished. Millions of Americans reach retirement every year without enough saved to retire in comfort. And based on the stock market's historical average rates of return, every dollar you remove from your retirement savings today will reduce your retirement savings by $10 for every decade between now and the date you retire.

2. Cashing out now is selling at fire-sale prices

Stocks are still down more than 20% from the pre-crash peak. The S&P 500 (represented in the chart below by the SPDR S&P 500 ETF Trust (SPY 0.14%)) is down 23% at this writing, and other indices are down even more; many small- and mid-cap stocks are down even further. The iShares Russell 1000 ETF (IWB 0.18%) is down 24%; the Vanguard Mid-Cap ETF (VO 0.19%) is down 29%; the Vanguard Small-Cap ETF (VB 0.09%) is down 32%.

^SPX Chart

^SPX data by YCharts.

By cashing out now, you're selling at what history says is the best time to buy. Even if the market falls further -- which it could as more economic data comes in -- historically speaking, stocks are likely to be much higher in three years. So even if you pay back the principal amount of your early withdrawal, you'll have missed out on the market's gains that your money could have earned.

3. You probably won't pay it back

A lot of people will pay back what they withdraw now within three years. But many will not, and they'll get hit with a tax bill. So not only will you be putting your retirement more at risk by depleting retirement funds -- and probably missing out on the gains of a recovery -- but you'll end up owing the government taxes and penalties.

When does it make sense to take the early withdrawal?

The numbers don't lie: Millions of people are going to face enormous financial pressure in the months to come.

Here's a visual representation of how many people just filed for unemployment:

US Initial Claims for Unemployment Insurance Chart

US Initial Claims for Unemployment Insurance data by YCharts.

Chances are, another massive number of people will file this week and in the weeks that follow. You can't just shut off broad chunks of the economy essentially overnight and not see mass unemployment.

Congress enacted legislation that will send $1,200 to every American adult and $500 per child (with limits based on your latest tax return), and extended the eligibility for unemployment. The legislation, along with earlier actions taken by the Federal Reserve and the White House, will provide additional liquidity to businesses, but for millions of us, it won't be enough.

1. Funds of last resort

For millions of people, tapping into their retirement savings -- even if it's before retirement and during a market crash -- is simply the last option they have. Doing it without penalties and income taxes, so long as you pay it back, is a smart move if it keeps you from losing your home and helps put food on the table.

2. You don't have emergency savings

If you don't already have a safety net in place to help you prepare for a recession, this is your best chance to quickly create emergency savings. Taking out enough cash to cover six months or more of minimum living expenses, and sticking that money in a savings account, could be the smartest move you could make. After all, there's a good argument that those funds never should have gone into your retirement account to begin with.

Let's say that taking that action now will help you sleep at night, and you're sure you can leave the rest of your retirement savings alone in the future. In that case, then doing it now, when you can avoid tax and penalties as long as you repay it in the next three years, could be the smartest financial move you could make.

Older man and woman under an umbrella

Image source: Getty Images.

Seeing past the uncertainty

Millions of people are staring down a lot of uncertainty. In our efforts to keep people healthy and avoid overwhelming our healthcare system, tens of millions of Americans will go without work for months, and perhaps much longer than we expect.

For many of those people, retirement savings may represent their only resource to cover basic expenses. For others, the bailout package could mean a chance to finally create an emergency fund, even if they don't need it right now.

But with those exceptions, taking money out of retirement savings right now is a value-destroying move that could affect your ability to retire on your own terms. While it's hard to see the end, things will return to normal. We will beat COVID-19. You will want to retire one day.

Do what you must to take care of now, but don't put tomorrow at risk if you don't absolutely have to.