Many people are experiencing financial hardship as a result of our current health crisis. In response, the Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law in late March, designated federal funds for economic stimulus and included provisions that make it easier for those affected by the coronavirus to access retirement funds through a withdrawal or loan. Early withdrawal penalties are waived, and applicable taxes (20 percent of the distribution) can be spread over a three-year period, while loan repayments can be deferred through December 31, 2020.
If you’re in a difficult financial situation and participate in the Retirement Savings Plan of the Presbyterian Church (U.S.A.), one of these options may sound like the perfect solution. But taking a withdrawal or loan from your retirement savings may end up costing more than you think.
By taking money out of your retirement savings now, when the market is low, you lose the potential for earnings (the power of compound interest) as the market improves and possibly recovers. That can have a significant impact on your retirement income down the road. A substantial withdrawal from your retirement savings can also put you in a higher tax bracket, although you might be eligible for a tax refund if you can pay back the amount you took out within three years.
Similar to a withdrawal, borrowing from retirement savings means you will lose the earning power that money would have had. You must repay the loan — with interest — within five years (if the loan will be used to buy a primary residence, the repayment period may extend to 15 years). If you defer loan payments during 2020, as the CARES Act allows, the loan then re-amortizes and your payments will be higher when you start making payments again. If you cannot repay the loan within the specified time period, the outstanding balance is taxed as if it were a withdrawal and you’ll pay a 10 percent early withdrawal penalty (if you have not reached age 59½).
Managing Unexpected Events and Expenses, a new, on-demand webinar from Fidelity Investments (Retirement Savings Plan recordkeeper), can help you evaluate your spending, take control of your budget, and understand your financial options after an unforeseen event. This free, 15-minute presentation points out the downside of taking money from your retirement savings and gives you alternatives that may cost less in the long run.
A Fidelity retirement planner can review your situation and help you make the most appropriate decisions. Learn more about getting a complimentary, one-hour consultation (available regardless of whether or not you participate in the Retirement Savings Plan), then call to schedule an appointment.
Participation in the Retirement Savings Plan is a long-term investment in your financial future. In times of economic hardship, consider all other options first and only take money from your account if you have no other choice. Even if you put the money back later, taking a withdrawal or loan now means you will have less in retirement.