We’ve covered this before in this space, but as the coronavirus pandemic continues to evolve and wreak havoc on the American economy, many Americans are at least thinking of ways they can stay afloat should they lose their jobs. We’ve always spoken of borrowing from or cashing out your 401K as a last-ditch, emergency option, but these desperate times may call for those types of desperate measures for many Americans.
Before we get into some of the details about withdrawing from your 401K, it’s first worst noting that Congress is likely to soon pass a $2 trillion economic stimulus bill that will significantly boost compensation and benefits for workers who are unemployed or have been furloughed due to the coronavirus. Once it’s passed — and it may very well already have been signed into law by the time you read this — make sure you take the time to learn what it means for you. If you still think borrowing from your 401K is necessary, then read on.
Normally, if you withdrew money from or cashed out your 401K before you hit that magic 59-and-a-half years age mark, you’d be subject to a 10 percent early withdrawal fee, not to mention income taxes on what you’re withdrawing. If you took out a loan against it, you’d be required to pay it back — with interest — within a designated timeframe to avoid further penalties.
The good news is that in the stimulus package that Congress is soon to pass, there could be some relief in there for Americans who need to go this route. In fact, CNBC is reporting that it will allow Americans to make a hardship withdrawal from their 401K of up to $100,000 without having to pony up the 10 percent fee that normally is associated with such. The bad news is that you’ll still have to pay income taxes against the amount that you withdraw, but you’d have up to 3 years to both pay those taxes and replenish the money that you took out of the account.
We’d also suggest that you check in with your 401K plan provider and make sure you know the rules and regulations it abides by. Some may require proof that plan holders exhausted every other avenue of income that they have before OK’ing any type of hardship withdrawal.
The bottom line is that even with the loosened regulations, you should still consider a withdrawal from your 401K as a last-ditch option. You’re still on the hook for taxes and you’ll have to repay what you took out in a relatively short period of time.
Again, the stimulus package that’s soon to receive the President’s signature is the most aggressive of its time as it pertains to keeping Americans financially sustainable in these unprecedented days. We strongly advise you understand the bill and know what to expect in terms of unemployment assistance and expected stimulus checks before you pursue a hardship withdrawal.