Please ensure Javascript is enabled for purposes of website accessibility

Don't Raid Your Retirement Savings to Cover Coronavirus Costs -- Do This Instead

By Christy Bieber - Apr 16, 2020 at 9:58AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There are other options you should take advantage of first to get you through this economic downturn.

The Coronavirus Aid, Relief and Economic Security Act (CARES Act) enables you to make penalty-free withdrawals of up to $100,000 from your retirement accounts or to borrow up to $100,000 or 100% of the vested balance of your 401(k).

While the Act has made it easier to access money you've invested for the future, that doesn't mean it's a good idea to do so. 

In fact, raiding these accounts can have long-term financial consequences you likely want to avoid. Instead of taking money out, there are some other steps you should take instead. 

Broken piggy bank with coins spilling out

Image source: Getty Images.

Why you don't want to withdraw money from your retirement funds

Taking money out of retirement accounts comes with a whole host of downsides, regardless of whether you borrow or make a permanent withdrawal. 

If you take out a 401(k) loan, you run the risk of getting hit with a 10% early-withdrawal penalty if you can't repay it. The CARES Act didn't eliminate this, so if you borrow this year and find out later that you can't make your payments, you'll lose part of the money you took out to the IRS.

Even if you manage to pay yourself back, the interest you pay likely won't equal what you'd have earned from investments during the repayment period. That's especially true if you sell investments at a loss in order to borrow during the COVID-19 crisis. You're also double-taxed on the money you pay back, as you make your payments on the loan with after-tax funds and are taxed on withdrawals when you take money out as a retiree.

If you withdraw money, the impact is even worse. While the CARES Act did eliminate the 10% penalty for 2020 withdrawals made in response to COVID-19, you still have to pay taxes at your ordinary rate on withdrawn funds. These payments can be stretched out over three years, but if you spend the money now and have to pay taxes on it during the next several years, that could create an ongoing financial strain. 

Plus, the money you've taken out will no longer grow and help support you in retirement. The loss of potential investment gains is a big one. A $20,000 withdrawal from your 401(k) now would leave your retirement account with about $137,000 less money in it in 25 years, assuming an 8% average annual return on investment.

How you can avoid taking money out of your retirement savings 

Leaving your retirement accounts alone is clearly the right financial move, but you may feel like you have no other options. In reality, though, most people can find help elsewhere to get through the coronavirus crisis.

First and foremost, you'll probably be getting a government stimulus check worth up to $1,200 per person and $500 per dependent child. You should also file for unemployment if your job has been lost or hours cut. The CARES Act expanded benefits to workers who normally don't get it and provides for an additional $600 a week in income. 

Most creditors are also working with customers to suspend payments without any late fees, penalties, or damage to credit scores. While interest will continue accruing, it's worth talking with your creditors if you cannot pay your bills right now -- especially if you only need to wait a short time until you get your stimulus check or your unemployment benefits start. 

If you can reduce spending and find a way to make your budget work with the help available, always try to do that to avoid the serious financial consequences of taking money out of retirement accounts.

Keep your money invested where it belongs

The coronavirus crisis is hopefully a short-term situation, and you'll be able to get back on your feet financially within a few months when the country opens up for business again.

But if you raid your retirement accounts, you could jeopardize your financial security in the future. Follow the advice here to avoid doing that so you can leave your money to work for you. 

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.