If you have to take money from a retirement account, make a plan to replenish it immediately
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We may receive a small commission from our partners, but our reporting and recommendations are always independent and objective. About half of Americans have taken or plan to take an early withdrawal from a retirement account during the pandemic, according to one survey. Even if your retirement account is your best option for quick cash right now, tread lightly, says a financial planner.If you had to pull cash from a retirement account lately, you're not alone. so far. Small businesses have shuttered and pay cuts have become commonplace. These are dire financial straits.of around 1,200 Americans with retirement savings conducted by Magnify Money, 30% of the respondents took a withdrawal from a retirement account in March or April. The average withdrawal was roughly $6,757. Another 19% of the respondents said they hadn't tapped their retirement account yet, but planned to. While most people are using the cash to cover expenses or make up for a job loss, one-fourth of the respondents said they did it to take advantage of CARES Act legislation, the $2 trillion relief bill signed into law at the end of March.The CARES Act temporarily waives the standard 10%up to $100,000 that are taken under age 59.5 from qualified plans, like 401s, as well as IRAs. The distributions are still included in gross income, but can be spread out and taken over three years to avoid one big tax bill next year. The no-penalty allowance applies to "coronavirus-related distributions" — i.e. people who are diagnosed with COVID-19 or have experienced financial hardship from quarantine, layoffs, reduced hours, or furlough up to December 31, 2020.early. Even if there's no penalty charge, an early withdrawal reduces your balance and diminishes future earning potential.Bill Van Sant, a certified financial planner and senior vice president and managing director at , a Philadelphia-based wealth management firm, says he hasn't seen many clients go for their retirement accounts during the pandemic, even those who have lost employment. But that may be due to the nature of his sample.will understand the effectiveness of the three-bucket system: one for short-term expenses, a second for mid-term goals, and a third for retirement. There can be multiple accounts in each bucket, but the point is that your retirement account is the last place you'll go for last-minute cash. But, it might still be a better choice than going into debt, he says. "If I'm personally talking to a client and if the decision was they need money and they need to pull from a retirement account or load up a credit card, I'm going to go with the first option," Van Sant says. "But, I'm going to remind them that once the dust settles, we have to come up with a plan to start replenishing." Since there's no requirement to replace the money withdrawn from a retirement account like there would be with a retirement plan loan, it's easy to put off. But you have to make a conscious decision to "pay yourself back" through increased paycheck contributions when your income returns to pre-pandemic levels. "It's not necessarily free money because this is going to have an adverse effect," he says. "Further down the line they may think, 'Hey this is a great resource to have. I just pull 30 grand out. No problem. You have to pay taxes on it, but my income was low anyhow because I wasn't working. I'll do this whenever I need. Well, that works.'" "That makes you feel comfortable," Van Sant continues. "Now that may not have a big impact on your life now, but fast forward and you want to retire, that could be pretty damaging."
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