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No Penalties for Early Withdrawal on 401k

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    If you are facing economic hardship in these uncertain times and have a tax-deferred retirement savings account, like a 401(k) or an IRA, there is some good news for you during this time.

    The CARES Act temporarily removes the penalty for withdrawing on your retirement savings account early. That penalty is usually 10% (steep) and normally applies to anyone withdrawing before the age of 59 1/2 years old. For the time being, this waiver seems to be in effect throughout the year 2020.

    Another change is the maximum borrow amount you can withdraw. It is typically $50,000 and its now temporarily been raised to $100,000.

    There are conditions though, some what. If you are unemployed the penalty is automatically removed. If you are still employed you have to get approval from your company by showing you have been economically effected. Shouldn't be a hard thing to do, but it is still something you will have to talk to your employer about.

    Question becomes, should you do it? Seems to entirely depend on your situation. Hoping others can chime in here too as I can't quite seem to nail down some of the finer details. Hoping this thread can help people decide if they should tap into their retirement savings right now or not, if they need immediate cash.

    Here are some of the pros and cons I have come up with so far:

    - No early withdraw penalty
    - You would get immediate cash flow
    - You have up to 3 years to put the money back into the account to avoid paying income taxes on the borrowed money

    Any others you can think of?

    - If you don't pay the money back soon, you miss out on compounding returns
    - If you don't pay the money back within 3 years you will owe income taxes on funds withdrawn (though you will have 3 years to be able to pay on those taxes)
    - If you don't pay your account back at all your retirement savings will be smaller when you retire, considerably smaller if you withdraw a lot

    Thing is you CAN withdraw up to 100k. But you clearly don't have to take nearly that amount. If you only need a few thousand dollars and think you can reasonably pay it back in a year or two, I don't see the harm.

    The only argument I have seen made is maybe its not a good idea to do it unless you have to, because the market is tanking at the moment and if you are invested in stocks or other money markets tied to your 401k that its like selling stock when its at its bottom. But then I read this article and think maybe that's not true either.

    Thoughts, opinions? Are you taking advantage of this penalty-free window or not, and why?

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    I think that this is a great option for those who need it. I don't think it'd be the best route to go if you're someone who is just looking to ad a few thousand to their savings account or similar, but I do think it's a good option if it's necessary to keep a checking account afloat for the meantime.

    I'm really, really hopeful that once we have the situation under control that things will bounce back greatly. I'm not saying it'll skyrocket, but it will bounce back up. This is just something to keep in mind when messing with your longterm finances.

    There's also the stimulus checks that will be inbound soon. Though I know some are in the situation that require much more cashflow to keep up with their lifestyle. Maybe that's where I can see this come in handy the most. If you're considering pulling cash out of your 401k just as a pillow, that probably isn't a great idea.

  • Are you sure you want to delete this post?
    Thanks for posting. I'm sure this could be a great relief for those who have been laid off or furloughed due to the current situation. I can see where this could save someone in a true financial emergency. At least the idea will offer peace of mind to those who are worried and have a 401(k). Just the idea of having a possible emergency fallback can help with pressure and stress, at the very least.