If their finances have been or would be negatively affected by coronavirus, most workers — 56% — say they would use their savings to cover their bills, according to a new survey from the Transamerica Center for Retirement Studies. But another 14% of workers say they would withdraw money from their retirement accounts, a move most financial experts traditionally warn against.
But in a post-Covid world, with some 38 million Americans out of work, the old rules of leaving your retirement savings alone don't always apply.
"While it is usually best not to touch your retirement funds, the pandemic and its impact on jobs and the economy have really hurt some who don't have a sufficient 'rainy day fund,'" Jill Fopiano, CEO of Boston-based O'Brien Wealth Partners, tells CNBC Make It. "The current situation might justify tapping retirement savings as a last resort."
Here's when it makes sense to dip into your retirement accounts.
When to tap retirement savings
Before looking to your 401(k) or IRA, first ask for forbearance on payments from, for example, your credit card company, Brittney Castro, Mint's certified financial planner, tells CNBC Make It. Here's what to say if you can't pay your rent, student loans or credit card bills. That can give you breathing room for a few months. Also consider a loan from a family or friend, if that option is available to you.
"Call your bank, mortgage lender, landlord, or other creditors to work out an alternate payment arrangement," says Castro. "If you do have to tap into your 401k, and again, this should be a last resort, you should take out as little as possible by withdrawing only what you absolutely need."
If you are going to withdraw money from your 401(k), under the CARES Act, the $2 trillion economic stimulus package signed into in March, individuals under financial strain from Covid-19 can withdraw up to $100,000 from their retirement savings, including 401(k)s and individual retirement accounts, without the typical 10% penalty in 2020. You then have three years to either pay the taxes due on the withdrawal, or to repay what you took out without being taxed.
But there's a catch: This option isn't available to everyone. Of course, the 15% of Americans without retirement savings don't have this bucket to draw from. And it is also dependent on whether your employer makes this option available, in the case of 401(k)s.
Another option: Tap into your Roth IRA, if you have one. You can withdraw your contributions to this account at any time without taxes or penalties, as you've already paid taxes on the money you put into the account.
Finally, your bank may be able to offer you a personal loan. The average interest rate for a two-year personal loan was around 9.6% in February, according to the most recent data from the Federal Reserve. But with that relatively high rate, it might make more sense to try the 401(k) loan first.
Check out: The best credit cards of 2020 could earn you over $1,000 in 5 years
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May 22, 2020 at 10:48PM
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What to know about tapping your retirement savings if you lose your job due to coronavirus - CNBC
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