Want to raid your 401 (k)? Here’s what to consider.
Thinking about making an early withdrawal from your retirement account? Here’s what to consider in the United States
The provisions of the stimulus bill passed by Congress in late March allow those affected by the coronavirus crisis to withdraw up to $ 100,000 from 401 (k) plans or individual retirement accounts.
To be eligible, the account holder, or his or her spouse or dependent, must have been diagnosed with coronavirus or lost income due to layoff, business closure, quarantine, ” a reduction in hours or an inability to work due to a lack of childcare.
They can pay the income tax due on the withdrawal over three years. They can also choose to return the money to a retirement account within three years and recover the tax payments. Children under 59 and a half are exempt from the 10% penalty which normally applies.
The stimulus legislation doubles the amount that crisis-affected 401 (k) participants can borrow from a retirement account to $ 100,000 or 100% of the account balance, whichever is less. (IRAs don’t allow loans.)
2. What are the disadvantages of withdrawing money?
Taking money from a retirement account can help make ends meet at a difficult time. But people who are withdrawing money now are likely to sell after their account total has gone down, due to the recent market downturn blocking those losses.
And those who are unable to increase their savings over the following years to make up for what they have withdrawn risk being poorer in retirement. In addition to the withdrawal, they lose any returns that the money could have earned. A 42-year-old who withdraws $ 50,000 now will have nearly $ 200,000 less in savings at age 67, assuming an annual return of 5.7%.
3. If I need to dip into my retirement savings, do I have to withdraw or borrow?
There are advantages to borrowing from a 401 (k). Generally, these loans are a less expensive source of debt than alternatives such as credit cards. And they don’t require any credit checks or guarantees.
Borrowers must repay themselves, usually over a period of up to five years at an interest rate set by the 401 (k) plan.
A withdrawal can offer more flexibility. As with a loan, these withdrawals can be repaid.
Plus, for those worried about job security, a loan can be risky. When people quit their jobs, most 401 (k) plans require a borrower to pay off the remaining balance within 60-90 days or face a default, which means the employee has to pay back money. income tax on the remaining balance, plus a 10% penalty if it is a minor. 59½.
On the other hand, those who opt for a withdrawal instead can skip the 10% penalty.
4. What are my options for getting back on track?
Your basic choices are to save more, work longer, or spend less in retirement.
A simple way to save more is to commit to increasing your savings rate by a small amount, like 1% or 2%, each year if you can. The key is to enroll in Auto Escalation, a program offered by many 401 (k) plans that allows individuals to commit to gradually increasing their savings rate over time.
Likewise, you can commit to saving a portion of your future profits, including tax increases, bonuses, and refunds.
Another solution is to plan to delay retirement. Working longer, even part-time, allows a person to delay the use of their retirement savings and reduces the number of years of retirement. For each year that someone postpones taking Social Security between age 62 and 70, benefit checks increase by about 7% to 8% after inflation.
Write to Anne Tergesen at [email protected]
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