It seemed like a good idea at the time: Allowing Americans to withdraw from their 401(k) accounts penalty-free when the COVID-19 pandemic hit.
With many people facing job and financial uncertainty, the ability to tap into their retirement funds provides some needed short-term stability.
“When the government allows people to withdraw $100,000 from their accounts, I’m pretty frustrated, to be honest,” personal finance expert Suze Orman told MoneyWise in a recent interview.
Allowing people to rob their future selves is a big mistake that many will regret in retirement, says the author and host of the Women & Money podcast.
“If you can’t pay your bills when you’re getting a paycheck, how are you going to pay those exact same bills when you’re no longer getting a paycheck?”
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The CARES Act, the COVID relief law enacted in March 2020, made it easier to withdraw money from a 401(k) or IRA.
It allows people to withdraw up to $100,000 from their account and pay it back over three years without the normal 10% early withdrawal penalty and tax.
For Americans desperate for cash, their 401(k)s are an enticing opportunity to get them in other ways.
In spring 2020, nearly 20% of all 401(k) withdrawals between April 6 and June 26 were related to COVID, according to CNBC.
At Fidelity Investments, the largest 401(k) plan provider in the US, more than 700,000 people have withdrawn from their 401(k) or 403(b) plans, CNBC reported. The median was around $5,000, while more than 18,000 asked for the full $100,000.
Vanguard’s “How America Saves in 2021” report found that in 2020, more than 7% of people dropped out of a 401(k) or 401(b) — similar to a 401(k), but for nonprofit corporations.
But taking money from those retirement accounts at the time ended up costing people more in the long run, Orman said.
“It tells you that people don’t have emergency savings accounts,” she said.
Orman hopes to help people avoid this in the future. She co-founded a company called SecureSave that helps people save in a way similar to a 401(k).
The unseen costs of investing in a 401(k)
People who took money out of their accounts at the time missed an opportunity to make that money work for them during the historic market gains following the 2020 lows, Orman said.
“They allowed them to do that at the exact time the stock market was skyrocketing — skyrocketing, right, so they missed out on huge growth, especially if they were close to retirement at the time.”
Now that the stock market is in a bear market and there’s more uncertainty in the economy, putting that money back into your 401(k) doesn’t look all that appealing.
read more: Trade When Markets Are Falling: Here Are The Best Investing Apps To Catch “Once In A Lifetime” Opportunities (Even If You’re A Beginner)
In fact, a new report from Fidelity shows that the average 401(k) balance is down 23% year-over-year due to market volatility.
“People who are working today are watching their 401(k)s go down 10 percent, 20 percent, 50 percent,” Orman said. “You can mark my reserve and they’ll stop contributing to their 401(k) because they’re afraid of dying.”
Don’t invest in your 401(k) now
In addition to missing out on historic gains, taking it from your 401(k) could leave you vulnerable if you need to declare bankruptcy, Orman said, because the 401(k) is protected from bankruptcy if you need to and can’t move it by declaring it.
“So, if you’re in a really dire situation where you’ve got all this debt and you’ve got everything underwater and you need to file for bankruptcy to get out of it, you still have your retirement accounts.”
By making it easy to withdraw money from these accounts, lawmakers are allowing many people to put their financial futures at risk, Orman said.
“If you start pulling money from your retirement account just to pay the bills and use it for anything other than retirement, you’re going to use up all your bankruptcy-free money to pay the bills,” Orman said. “Now you don’t have the money to do that.”
But Orman also recognizes the fears that come with uncertainty and how those fears affect what you do with your money, and right now, there’s a lot of uncertainty.
“I feel for them,” she said. “I have feelings for them. I understand the fear they’re going through.”
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Watch Now: Full Q&A with SecureSave’s Suze Orman and Devin Miller
This article is for information only and should not be considered advice. It provides no guarantees of any kind.