WASHINGTON — QUESTION:
Can you take money out of your 401K during the pandemic without penalty?
Yes, but only for a limited time, and there are some caveats you need to consider before withdrawing money.
Advice from two financial experts
With millions of Americans filing for unemployment and struggling to pay bills, looking for ways to get cash right away is important, even if it means breaking the retirement piggy bank.
So, our Verify team looked through the CARES Act and advice from financial experts to determine if you can take money out of your 401K during the pandemic right now without penalty.
Under the CARES act, passed in March, people of any age affected by COVID-19 – like having a health issue, job loss, or cut wages – can take a withdrawal of up to $100,000 from their retirement savings, including 401(K)s or individual retirement accounts, without the typical penalty.
This new provision for the coronavirus only applies for 2020.
Additionally, you wouldn’t have to worry about the mandatory 20 percent withholding for federal taxes.
That all sounds good, right? Well, financial experts suggest recalibrating your budget and then go from there.
“Needs, wants and wishes,” Charles Schwab Vice President – Branch Manager Joy Stephens said. “There are things you're going to need from a very basic level. Shelter and food, pay your rent and pay your insurance.”
If you still need to withdraw, remember, taxes would still be owed. But it could be spread over tax returns in 2020, 2021, and 2022.
Something else to keep in mind – if you put the money back into the retirement account within three years, your earlier tax returns can be changed, and you could ultimately avoid paying taxes on the COVID-19 withdrawals.
Other financial experts warn that taking money out of retirement should only be used as a last case scenario.
"I would say millennials, young persons, even persons of my age don't have a lot to worry about,” David Flinchum, a partner and financial expert with Cherry Bekaert LLP said. “Remain calm, stay invested. My guess is that the market will recover."
Ultimately, we can verify, yes – you can withdraw from your 401K and retirement savings without penalty, but only for this year, and you must be impacted by the coronavirus.
Also remember, the money isn’t completely free. So make sure you consider all options and weigh the long-term vs short-term before breaking the glass on retirement savings.