CARES ACT 2020

Just a heads up - for some people this may be very helpful.

The CARES Act allows you to withdraw some or all of your 401k, up to $100,000, without the typical 20% early withdrawal tax and with no processing fees from your 401k handler, which is usually 10%

The withdrawal will count as 2020 income and you will be taxed normally based on your AGI for the year.

This may present an interesting opportunity to some people who have a lot of high interest debt. I won't bore you with the math, but you should do it for yourself. For example, if you have $10k in credit card debt, for which you are paying 19% APR, for most tax brackets it would be beneficial to withdraw $10k from your 401k, pay that credit card debt off, and adjust your 401k contributions so that the money you would have been using to pay that credit card debt and interest off is now going into savings for your retirement.

The benefit is more pronounced if you have higher credit card debt.

An additional benefit is that paying off this credit card debt can potentially increase your credit score, allowing you to refinance high interest home and auto loans, or purchase new loans at a better interest rate.

I've run some scenarios for my situation, where I don't really have any credit card debt other than a small balance on an American Express/Delta card that I use for normal purchases and pay off monthly... Even though my cars are both financed with low interest rates, it makes sense to pay one off now and put that additional money back into my 401k, or in this case I'm going to put it in a high yield savings account each month until the market isn't a giant pile of red-hot garbage.

Do the math for your own situation - I'm not trying to be your financial advisor, just wanted to make people who might not otherwise be aware of this potential savings strategy.

You have to be disciplined for this to work. If you are going to pay off CC debt just to rack it up again than this plan is not for you!

 

Yes i bought two properties with my 457

 

true but that 100K in your 401K might bring a lot of money when the market bounces back and it will. Now if you have a home and thinking of refi, you could take out more money and pay off those credit cards on a low interest rate. 3.5% ish

 

It's a risk you take, but I personally think the market is going to take a bit longer to show any real gains. I know there are several projections out there that say it's going to bounce back right away.

Even so, I'd rather pay debt off now and pay myself back + interest than shift debt from one place to another, although what you're saying does make sense for many situations. It all depends on your personal situation and goals.

Most of the time you pay to refinance, either taken off the top of any cash out you would have received, or financed into the loan. Something to consider if you're refinancing and NOT getting a better rate. My rate is already about as low as they can possibly get.

 

true, this is really a personal decision, some options out there in those strange times.

 

What if you make back your $100k back in cashflow in 5years and still get 6% interest you pay yourself back

 

Another point, if you repay the withdraw back in 3 years, you get back the taxes that you paid for the withdraw in 2020.

Everyone is different and depends on spending habits. Some people may take a withdraw to pay down their debts and then see that they have no debts so now they can go on a spending spree since they just got "rid" of their monthly debt payment. Others will use this to save on interest and then pay themselves back buy investing it or what not. While the options are there, it is not for everyone.

Another option is the call the card issuer to try to negotiate a better rate.

 

hmm... might not be a bad way to put a little cash into the studio to keep it going. but, along with the pay cut the day job issued this month, they suspended 401k contributions. no date was mentioned on when that might be reversed.

i dunno. might still be worthwhile. thanks for mentioning it.

 

Great call out OP on some of the measures and programs being put in place. It’s good for folks to know their options.

 

so, i'm digging into this a bit today. i'm on the fidelity site and have been presented with this information when looking into a withdrawal...



that all makes sense. but then i'm given a list of reasons for the withdrawal.



each reason has a very specific set of documentation requirements. i do not yet meet any of those reasons nor the associated documentation.

maybe other financial institutions are different but, in my case, this is not an option.

 

It definitely changes based on the financial institution / employer. My employer uses Transamerica Retirement and the requirements are much easier to meet. For us there is no documentation requirement - just a form we use to "self-certify" that we meet one or more of the criteria for an early withdrawal.

One of the criteria listed with mine that seems very vague and open to most people is something like "a loss or lowering of wages/compensation due to covid-19.." Considering that our bonus program has been temporarily suspended I believe my entire company qualifies for this type of early dispersal.

I am curious if you called them if they may have information that isn't yet posted to your account?

 

no, i didn't try calling yet. front end of the fidelity site has a bazillion pop ups saying to use the online form for CARES related stuff and not to call. i might try calling them later. i just have to get motivated to sit on the phone for a very long time.

for me, day job reduced salaries by 7.5%, suspended 401k match and i haven't seen a commission check in i don't know how long. all of that is in addition to the 11 or so percent cut from february.

 

it probably has very specific requirements to withdraw I'm thinking. Have you checked the CARES Act details ?

 

So use the first reason. Your income went down, can't afford to pay rent or mortgage payments.

 

Don’t do it! You will never replace it.

 

Depends who holds your 401k. With mine we have the option to pay back what we ask to be disbursed and won’t have to pay taxes because it will be considered a loan.

 

Correct, but most will not pay it back.

 

meanwhile 401Ks going up lately. you wouldn't want to miss on that.

 

Best time to buy into the market is when it's under valued.