Ask Clark: Should I Take Money From My 401(k) Right Now?

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401 K plan in tablet with money on a table
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The economic fallout from the coronavirus pandemic is staggering. Practically overnight, more than 26 million Americans have joined the ranks of the unemployed.

Many of those 26 million Americans were first-time filers for jobless benefits. As you may know, the application process for unemployment insurance varies by state. And we’re seeing reports that the process isn’t going smoothly for everyone.

Even if you do manage to successfully apply without a hitch, the U.S. Department of Labor says you won’t see your first unemployment check for about two or three weeks.

That’s prompted some people who are out of work to consider tapping their 401(k) accounts in the interim.

Here’s What You Need to Know About Borrowing From Your 401(k) Today

Under normal circumstances, there are early withdrawal penalties if you choose to withdraw from your 401(k) before age 59.5. These include:

  • Standard 10% penalty for early withdrawal, unless you’re 55 or older in the year during which you leave your employer
  • State income tax
  • Federal tax, based on your marginal income tax rate

But, because of the severe economic disruption to people’s lives from the coronavirus, right now you’re allowed to withdraw up to $100,000 from your 401(k) and pay the taxes over three years. Plus, you won’t get hit with the 10% early withdrawal penalty at this time.

As you can imagine, most personal finance experts do not recommend raiding your 401(k).

“This should be a last financial move, not an early one,” money expert Clark Howard says. “When you’re out of ways to deal with your life and your finances, that’s when you do this.”

So how do you really know if you’ve reached the point where a 401(k) withdrawal would make sense in your situation?

“If for all practical matters, you can’t put food on the table without drawing down some of your retirement money,” Clark says, then you’re probably there.

Having said all that, if there is a bright spot here, it’s that we had an underlying strength to the economy going into all this. So the recovery will be real when it comes.

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“This desperate hour that we’re in is not going to go on forever. As sharp and steep and rough and quick as this decline has been, we will recover in a much quicker mode than we did from [the Great Recession],” Clark says.

Have a Plan in Place for Financial Triage

As we’ve discussed, taking money out from your 401(k) is a choice that shouldn’t be taken lightly. But it might be a necessary step if you’re unemployed and having trouble submitting your application for jobless benefits.

If you’re going to take this step, be sure you have a solid plan about how to spend the money you’re going to draw down.

Clark has a formula for determining which bills get paid when you have limited money. In short, his “financial triage” system helps you prioritize expenses related to:

  • Food
  • Housing
  • Transportation
  • Utilities
  • Unsecured debt (credit cards and personal loans)

You can get his full rationale on why you should pay your obligations in this order in this piece: How to Decide Which Bills to Pay First When You Have Limited Money.

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