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14% of Americans with retirement savings, both working and unemployed, have already tapped into those funds

Kilito Chan

Whether unemployed or still working, many Americans are looking for extra funds during the coronavirus pandemic. About 14% of those with retirement savings have taken money from accounts such as 401(k)s and individual retirement accounts to meet that need. Another 13% of those with savings say they're planning to make use of their retirement funds.

That's according to a new survey of over 2,400 U.S. adults surveyed by YouGov on behalf of Bankrate. About 31 million Americans have already made a withdrawal or plan to do so, Bankrate estimates.

To put that number into perspective, over 58 million American workers contributed to a 401(k) plan in 2018, according to the Investment Company Institute, with many more contributing to other forms of retirement accounts. About 85% of Americans have some form of retirement savings, Northwestern Mutual's 2019 Planning & Progress Study found.

While that seems like a big number, it's surprising that so few have withdrawn money from their retirement savings to make ends meet, says Blair DuQuesnay, a New Orleans-based certified financial planner and investment advisor at Ritholtz Wealth Management.

"More than 30 million Americans have lost their jobs since early March, and we know that most Americans are unable to afford a $500 car repair, much less fund two months worth of living expenses," DuQuesnay says. But rather than being forced to use retirement savings, many Americans have been able to get by with the government stimulus checks and the extra $600 a week in unemployment benefits.

Yet with many people already taking a withdrawal and more considering it, it's worth understanding how this process works and what steps experts recommend you take if you do need to access your retirement savings. 

Congress made it easier to access retirement funds 

Not only did federal lawmakers aim to make it easier for Americans to push through the coronavirus pandemic by signing off on stimulus checks and increasing unemployment benefits, they also relaxed the rules allowing Americans to withdraw money from their retirement accounts if they were affected by the pandemic. Under the $2 trillion stimulus package known as the CARES Act, Americans can take a withdrawal of up to $100,000 from their retirement savings, including 401(k)s or individual retirement accounts, without the typical 10% penalty

Referred to as coronavirus related distributions, these withdrawals are available only in 2020 and only if your employer opts to allow them. The legislation gives Americans three years to either pay the income taxes due on the withdrawal or to pay back the money and not owe taxes on it.

Before the March legislation passed, if you needed to access retirement funds before 59½, you generally had to pay a 10% penalty on any amount you withdrew, as well as income taxes. There were a few exceptions to that rule, including education expenses, buying your first home, covering massive medical debts or being ordered by a court to provide alimony or child support.

Don't beat yourself up if you've dipped into retirement savings

Yet while lawmakers made it easier to take a withdrawal from your retirement savings, many experts say that it should not be the first step you take if you're struggling financially. First make sure that you have explored and exhausted the other options available to you, says Kevin Mahoney, a CFP and founder of Washington D.C.-based advisory firm Illumint.

Depending on whether you're employed or not, refinancing existing debt may help. Or you might be able to tap home equity. And don't overlook family and friends who may be able to help with temporary assistance. "No matter the specific circumstances, a retirement withdrawal should stay down as far as possible on the list of potential options," Mahoney says. 

"Withdrawing money from a retirement account is a reasonable move in a worst-case financial scenario," Mahoney says. But make sure you're only taking the money if you really need it.

If you tap into your 401(k) or other retirement accounts, make sure you're using the money to pay off outstanding debts or cover an income gap during this difficult time, says Michael Kelley, an Ohio-based CFP and founder of Kelley Financial Planning. Don't take it out to have an extra financial cushion or to make a big purchase, like a car. 

And if you did take money from your retirement savings, give yourself a break, DuQuesnay says. "No one predicted that a global pandemic would cause 30 million Americans to lose their jobs in just six weeks," she says. "Do what you need to do to get through the current crisis, then evaluate a path forward."

Make a plan to pay yourself back

While experts say that taking a loan or withdrawal from your retirement savings may be OK under the circumstances, you should have a game plan going in on how you're going to repay the funds, Mahoney says.

"It's OK if the plan changes more than once in the months ahead. And it's OK if you're not exactly sure how much you'll be able to replace each month or when the account will return to its current balance," Mahoney says. "Rather, this exercise is valuable because it reminds you that this is money you still intend to use later in life."

If you withdraw retirement funds as a loan from a current employer's 401(k) plan, you should also make sure you fully understand the rules of paying back that loan, Kelley says. That's especially true if you end up losing your job. "The payback rules can be very different for an ex-employee than they are for a current employee and you don't want to be surprised," he says.

Loans on 401(k) plans are not taxed, but you can only take up to half of your vested account balance and, under the new CARES Act rules, not more than $100,000, no matter how high your balance. The CARES Act allows loan repayments to be deferred until 2021, after which you'll have five years to repay the loan. You typically also still need to be working at the company to take a loan. Most 401(k) plans do not offer loans to former employees.

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With a 401(k) loan, there may already be a process in place to make automatic repayments right from your paycheck. But if you take a coronavirus-related withdrawal or a hardship withdrawal from your retirement accounts, you'll need to keep track of repaying it on your own. If that's the case, it may make sense to reach out to your HR manager or 401(k) plan provider to set up automatic monthly contributions, Kelley recommends. "That way, [you] don't have to remember to do it each month," he says. 

In general, it's best to keep track of everything, Mahoney says. In its guidance for Paycheck Protection Program loans, the government advises people to carefully track the accounts where the money is kept and how the funds are used. "A similar strategy can benefit people who have accessed retirement money," Mahoney says. If possible, set up a separate or sub-savings account to house the withdrawal. Then only use the money on carefully planned occasions. 

"Ideally, use the funds on fixed, essential expenses that you no longer can cover through other means," Mahoney says. If that situation never arises, just keep the money in a separate savings account until you determine you can safely return the funds to a retirement-specific account, he says.

Keep in mind that in order to pay back the loan or coronavirus-related distribution, you may need to adjust your spending to make up for the dip in retirement savings once you re-establish a baseline for your income, DuQuesnay says.

Ultimately, the typical rules of thumb related to retirement accounts don't necessarily apply right now, Mahoney says. "We all need to prioritize our near-term financial stability, and we need to have the ability to endure additional financial struggles in the months ahead."

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