It might have seemed like a good idea at the time: allowing Americans to withdraw from their 401(k) accounts without penalty when the COVID-19 pandemic hit.
Many people faced uncertainty about their jobs and finances, and the ability to tap into retirement funds provided them with much-needed short-term stability.
“I was so upset, honest to God, when the government allowed people to withdraw $100,000 from their accounts,” personal finance expert Suze Orman told MoneyWise. recent maintenance.
The author and host of the Women & Money podcast says allowing people to take their future was a big mistake that many will regret when they retire.
“If you can’t pay your bills when you get a paycheck, how are you going to pay those same bills later in life when you don’t have a paycheck anymore?”
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What happened
The CARES Act, a COVID relief law that was signed into law in March 2020, made it easier to withdraw money from one’s 401(k) or IRA.
It allowed people to withdraw up to $100,000 from their accounts and pay it back over three years without the normal 10% early withdrawal penalty or paying tax.
For Americans who needed cash fast, their 401(k) was a tempting well to draw from that otherwise would not have been available.
In the spring of 2020, nearly 20% of all 401(k) withdrawals between April 6 and June 26 were COVID-related, according to CNBC.
CNBC reported that at Fidelity Investments, the largest provider of 401(k) plans in the United States, more than 700,000 people have taken advantage of their 401(k) or 403(b) plan. The median amount was around $5,000, while more than 18,000 people requested the full amount of $100,000.
And how America saves from Vanguard report from 2021 found that more than 7% of people withdrew from their 401(k) or a 401(b) – similar to a 401(k) but available to nonprofits – in 2020 .
But Orman says withdrawing money from those retirement accounts at that time ended up costing people a lot more in the long run.
“That tells you people didn’t have an emergency savings account,” she says.
Orman hopes to help people avoid this in the future. She co-founded a company, SecureSave, which aims to help people save in a way that works like a 401(k).
Invisible costs of tapping into your 401(k)
People who took money out of their accounts at that time weren’t able to put that money to work during the market’s historic gains following the deep lows of 2020, Orman says.
“They allowed them to do this at the exact time the stock market was skyrocketing — skyrocketing, okay, so they missed out on huge growth, especially if they were close to retirement at the time.”
And now that the stock market is in bear territory and there’s a lot more uncertainty in the economy, putting that money back in your 401(k) doesn’t sound so appealing.
In fact, Fidelity released a new report that shows the average 401(k) balance fell 23% year over year due to market volatility.
“People working today are seeing their 401(k)s drop by 10%, 20%, 50%,” Orman says. “You can score my bottom dollar, that they’ll stop contributing to their 401(k) because they’re scared to death.”
Don’t dip into your 401(k) now
In addition to missing out on historic gains, withdrawing from your 401(k) can leave you vulnerable if you ever have to declare bankruptcy, Orman says, because 401(k)s are bankruptcy-protected and can’t be touched if you ever do. you need. declare it.
“So if you’re really in a terrible spot, and you have all this debt, and you’re underwater with everything, and you have to declare bankruptcy to get rid of it, you still have your retirement accounts.”
By making it easier to extract these accounts, lawmakers have enabled many people to put their financial futures at risk, Orman says.
“If you start taking money out of your retirement accounts just to pay bills and use it for something other than retirement, you’ll be using all the money that was bankruptcy protected to pay bills” , says Orman. “Now you don’t have the money to do that.”
But Orman also recognizes the fear that uncertainty brings and how those fears can influence what you do with your money, and right now there’s a lot of uncertainty.
“I have compassion for them,” she said. “I have feelings for them. I have understanding for the fear they are going through.
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WATCH NOW: Comprehensive Q&A with Suze Orman and Devin Miller of SecureSave
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.