Borrowing or withdrawing from your retirement fund a mistake? (part 1 of 3)
May 29, 2020 | by David Weis, MBA, CFS* Financial Advisor at Arsenal Credit Union
Summary: In this three-part series, we dive into the provisions of the new CARES Act and focus on changes made regarding your ability to withdraw from your retirement fund or borrow from it if you are in financial despair as a result of the current pandemic affecting your employment, health, etc. You’ll learn why it’s in your best interests to avoid doing either, and if you end up having no other choice but to take one of these actions, which option may be better for you.
The CARES Act included provisions that expand access to retirement funds in a 401(k), 403(b), 457(b) and an IRA. The big question is, should you tap into your retirement money now?
Short answer: no. If you can avoid doing this, don’t do it.
Whether it’s a loan or withdrawal/distribution, you are taking money you have saved for retirement to use now. That switch is one of the biggest mistakes that retirees make and regret once retirement arrives. Those funds could have been working for years to come by contributing potential earnings and growth for retirement. You can’t make up the lost earnings on the withdrawn dollars, which over time may have been important additions to your savings.
If you take a huge chunk out of your retirement savings, consider what that will do to your plans to retire. Will it delay or diminish them? How are you going to make that up? Most people will struggle to repay the withdrawal. It takes a long time to save large amounts.
Lowering your total balance makes it more difficult for your account to rebound. It takes money to make money; and the less you have the longer it may take.
Keep in mind that you can only access your vested balance. To determine yours, check your plan. While you always have access to your own contributions, any employer contributions may have a vesting schedule.
Also consider that withdrawals/distributions are subject to federal and state taxes. This reduces what you receive, which often prompts higher withdrawals or distribution amounts to cover the taxes.
If you borrow from your retirement plan, repay the amount if you can. Unfortunately, by the time you do, the market may have gone back up.
About the Author
For more than 12 years, David Weis has helped his clients develop, implement and monitor personalized financial plans. He specializes in retirement strategies and IRA rollovers for 401(k)s, 403(b)s, 457s, Profit Sharing, and TSPs. Learn more by visiting his website, or call 314.919.1058 or send an email to reach him.
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA / SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.