Before Cashing in Your 401(K) to Help Cover COVID Expenses, Your Credit Union in Las Vegas Advises You to Consider These Things
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) allows those impacted by the virus access to money in 401(K)s, 403(B)s and IRAs with fewer tax consequences. For example, persons under age 59.5 will not pay the typical 10 percent early withdrawal penalty or be subject to the automatic 20 percent withholding on up to $100,000 of withdrawals. Distributions also can be counted as income over three years instead of one or be repaid without tax consequences.
But, just because cashing in now has fewer consequences doesn’t mean it is necessarily your best option. Advisers at your credit union in Las Vegas can help you examine your choices. Here are some things to consider before withdrawing from your qualified retirement account:
Are You Eligible?
The first thing to consider is whether you meet the eligibility criteria. To be eligible you or your spouse must have experienced adverse financial or health consequences because of the virus. For example, you or a dependent were diagnosed with the virus or you or your spouse experienced financial hardship because of:
- Being quarantined
- Being furloughed or laid off or having hours cut
- Being unable to work because of a lack of child care
How Much Will It Hurt Retirement?
Whatever you take out of your retirement now will be unavailable for retirement later. Because you may be withdrawing your money during a low period in the market, you limit its ability to grow when the market rebounds. For example, a $100,000 withdrawal today from an account growing at a 5 percent rate would have grown to $160,000 over 10 years. You are withdrawing $100,000 to pay bills today but giving up $60,000 in the future.
How Will It Affect Taxes?
Even though the distribution income can be spread over three years, you'll still owe taxes on that distribution. If your income is lower in 2020 than it will be in 2021 and 2022, you may still be better off paying taxes on it this year. If you have a Roth IRA, you may consider withdrawing from that instead because Roth IRA withdrawals are tax-free.
Do You Have Other Options?
Other alternatives may exist to help you pay bills during this time. For example, many mortgage holders and other creditors will often work with you without impacting your credit report. Other non-tax-deferred investments might be a better choice for withdrawal than tax-deferred retirement plans. Finally, loans on your 401(K) or 403(B) might be better, especially if you plan to stay with your current employer. Loans are not subject to income tax if you pay them back on time and all loan payments due in 2020 can be deferred for up to a year.
Contact Your Credit Union in Las Vegas
The financial planning services available through Clark County Credit Union can help you make the right decision for your family. Contact our credit union in Las Vegas at 702-228-2228 today.