CMP Financial Planning

Should I Take a Withdrawal or Loan from my 401K?


Couple talking about retirement.

Millions of Americans are facing significant financial consequences as a result of the COVID-19 pandemic. Many special needs families are particularly hard hit because of the additional burdens of caring for their loved one under the pandemic restrictions. The CARES Act passed in March created several relief provisions for families and individuals, one of which included the ability to take 401K withdrawals or loans without penalty. This article discusses the pros and cons of taking withdrawals from your 401K account.  


Those who qualify for COVID-19 relief provision

CARES Act 401K Withdrawal or Loan Related Provisions

Although the CARES Act permits for 401K loans or withdrawals, your individual 401K policy may not. You will want to check with your 401K administrator to see if withdrawals or loans from your 401K are permissible 

Withdrawals

Loans

Pros and Cons of Taking 401K Withdrawal or Loan

Pro

Con

Although a person under the CARES Act can access 401K funds to meet living expenses, the cost of withdrawing these funds in terms of retirement savings is substantial. For example, a person withdrawing 50,000 dollars in his 401K at age 35 would lose almost 300,000 when they retire.  A better option for the family or individual if they own a home would be to take out a home equity line of credit HELOC loan. If obtaining a HELOC loan is not an option, the least costly option would be to take either a withdrawal or loan and repay them before incurring a penalty.  


References

1. Maxey, Daisy, April 6, 2020, Barrons “ 401(k) Hardship Withdrawals and Loans Are Different. We Answer Your Questions About the CARES Act”
2. Davis, Chris, May 6, 2020, Nerdwallet “Cashing Out a 401(k) Due to COVID-19? Consider These Things First.”