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The coronavirus stimulus package lets you withdraw from your 401(k), but should you?

No-strings-attached access to retirement funds creates lifelines, opportunities, and gambles.

The coronavirus stimulus package lets you withdraw from your 401(k), but should you?
[Image: OpenClipart-Vectors/Pixabay]

Did you know that the new stimulus package lets you withdraw funds from your retirement account without penalties or taxes this year? Yes, yes it does.

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This is new! And potentially a hot mess. Typically, making a withdrawal before age 59.5 would trigger a 10% penalty plus applicable income taxes. Now you can remove as much as $100,000 penalty-free before December 31, simply by telling your retirement plan company that you’re “experiencing adverse financial consequences” due to COVID-19 or facing personal or household COVID-19 diagnoses. Taxes are due in three years. Maximum loans against 401(k)s are also doubled, to $100,000. (FYI, IRA loans are not a thing.)

Finance experts suggest that you not do this. “You’re better off using anything else before using your retirement savings,” CPA Ed Slott told CNBC. Other loan options include Small Business Administration loans or home equity lines of credit.

“Don’t mortgage your future if you have other options,” Gregg Levinson, senior director of retirement at Willis Towers Watson, told Fortune.

However, if done responsibly, these “hardship distributions” can function as three-year, interest-free loans: Those able to return the money to a retirement account within three years will not pay taxes. Given that 3.3 million people filed initial unemployment claims last week, hardship distributions will be a lifeline for many, and they’re a reasonable option for those facing temporary low work.

For those who like to gamble with, um, their futures, the no-strings-attached access provides an opportunity to do things such as pay down higher-interest loans, or invest the funds elsewhere. Remember, things don’t always go to plan.

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