OT: COVID 401k withdrawal question

[Jaxdog]

With the passing of the Covid bill, individuals can now withdraw up to $100k from their retirement accounts and not pay the 10% penalty fee (if not repaid taxes would be owed but could be spread over three years).

I get the potential future loss of those dollars but I would think if someone were looking to get a little money out now might be a good time.

I’m not necessarily looking to do it but there seems to be like a lot of pretty savvy financial guys on here...what say you? And what would be the pros and cons of doing it?

 

[SirBarksalot]

Yeah I’d like to know this as well. Unfortunate to have to even start thinking about such things.

 

[civildawg88]

I don’t consider myself an expert but I would only do it as a last resort. Basically if I had lost my job and my savings was going to run out. Also when I got back on my feet, I would make sure to put the money back when I could

 

[8dog]

You have to have covid (or spouse or dependent does) or suffer financial harm due to all this to get the 10% waiver.

 

[Cooterpoot]

Don't touch it unless you have to.

 

[Xenomorph]

Words to live by.

 

[fishwater99]

Ya'll made me look. Only down 23% YTD, thought it would be much worse.
My plan is not offering withdrawal fee free yet, but has a message saying there will be updates soon.

 

[xxxWalkTheDawg]

With the passing of the Covid bill, individuals can now withdraw up to $100k from their retirement accounts and not pay the 10% penalty fee (if not repaid taxes would be owed but could be spread over three years).

I get the potential future loss of those dollars but I would think if someone were looking to get a little money out now might be a good time.

I’m not necessarily looking to do it but there seems to be like a lot of pretty savvy financial guys on here...what say you? And what would be the pros and cons of doing it?

man. I couldn’t see touching it now if you didn’t convert to something outside of equities before the drop. Leave it if you don’t absolutely need it. The Dow is almost 2000 points higher right now than when it double tapped the bottom. If you pull it now... you can make a 6 figure mistake pretty dang easily.

 

[TheStateUofMS]

I wouldn't pull it out unless you NEED it.

Just withdrawing funds because you're able to do it, does not make it smart. The best advantage of 401ks is the TAX DEFERRAL. If you take the money out, it can sit under the mattress and earn $0, or you can put it somewhere else and pay taxes on it every year.

Only withdraw from your 401k if you absolutely need it to live on and it might even make sense to do a loan and pay yourself back, but things can get dicey doing that as well.

I'm not sure what "getting money out right now because it's a good time means." You can have cash sit in your 401k outside of the market.

 

[TheStateUofMS]

We rallied 20% off the 3/23/20 low. It looked much worse before...sadly.

 

[TheStateUofMS]

We haven't had a double bottom yet. Just saying. We might though.

 

[Go Budaw]

Did not realize that. That particular part of the bill certainly won’t help the stock market. Kinda shocked anyone thought that to be a good idea, honestly.

 

[stateu1]

You have to have covid (or spouse or dependent does) or suffer financial harm due to all this to get the 10% waiver.

This is the right answer. The penalty will only be not applied if you use it for treatment and expenses if you actually have Covid 19. Don't do it.

 

[patdog]

Don't take money out of your retirement account unless you have to. If you want to sell some investments within your account, you can and reinvest in something else, even if that's just cash; just be sure to keep it in the account. Obviously, if you're still invested in stocks, you've already taken a big hit. No idea if there are more losses to come or how big the rebound will be (or even if there will be one).

 

[TheStateUofMS]

Letting people withdraw some of their own money penalty free for financial hardship is not a bad idea???.

Some things are more important than what the stock market does over the short term. I honestly don't think it'd affect the stock market much anyway.

 

[xxxWalkTheDawg]

We haven't had a double bottom yet. Just saying. We might though.

Poor choice of words. I guess I should have said current bottoms. But again, maybe it was. Hope so. I’ve bought some more energy stocks a couple weeks ago.

 

[o_Hot Rock]

I borrowed from mine about three times over the years but I always paid it back as quickly as possible and never decreased my contribution rate on top of the monthly payment. Getting it out completely seems like you are not just borrowing from your future but taking from it.

Two of my loans were to get out of credit card debt that was created by circumstance that I seemingly could not control. The last was to buy a 2nd house.

I figure I did alright, cleared high interest debt and that 2nd home thingy was paid off in a year (small fish cabin - not terribly expensive). If you just gotta, go that route if you can. You get a decent interest rate that's goes to you, no penalties, no taxes and no points, or closing cost other than small loan fee but you do lose the profit you could have more over the interest rate you are paying. Credit cards and loan companies are much worse on you though and you can come out ahead if that's where you are in the world. I don't intend to ever have to do that again because I am too close to retirement.

 

[fishwater99]

Most plans allow for a loan, so that could be an option for you if funds are needed.

 

[Go Budaw]

Letting people withdraw some of their own money penalty free for financial hardship is a bad idea???

Some things are more important than what the stock market does over the short term. I honestly don't think it'd affect the stock market much anyway.

Well given that 80% of the stock market is institutional money, I’d say there’s a chance it greatly affects the stock market. You already have companies right now cutting out 401k matches left and right which is going to hit that 80% pretty hard. This adds another avenue of money moving out of the market. And don’t act like only people in “financial hardship” would take advantage.

ETA: Looks like the penalty is only waived for COVID related health issues and treatment. So, nevermind.

 

[Go Budaw]

This is the right answer. The penalty will only be not applied if you use it for treatment and expenses if you actually have Covid 19. Don't do it.

Well that’s quite a different situation then. Good clarification.

 

[Seinfeld]

Yeah, the thought has crossed my mind to pull some out of my 401k and roll it into a Roth while the market is down, but I don’t qualify(thankfully)for a penalty-free withdrawal yet

 

[RBDog82]

Don't forget that it still counts as taxable income (assuming non-Roth), so you'll not only pay tax on the withdrawal, but it could potentially bump you up a tax bracket depending on where you are now and how much you withdraw.

 

[o_Hot Rock]

Not on a loan, it's not considered income or a withdrawal providing you pay it back in within the terms given. Let's say you get laid off, and you can't pay it back through payroll deductions, then yes, you will have to pay a penalty and income tax as if it's a withdrawal and maybe even worse for all I know. You better read up and not just take a message board strangers advice. Google is your friend.

I know I couldn't pay extra payments or any on the principal unless I paid off the full balance owed. They would only take my monthy payments through payroll deductions.

 

[TheStateUofMS]

Gotcha. Be careful in energy. I think the oil bottom is likely in, but the Saudi, Russia and Opec+ meeting will likely be a let down or sell the news event. If you went heavy, I think you should book a little profit soon. Maybe let it ride a little more, but I'd sell into strength. It kinda depends what you bought though. If you bought an energy stock with a current div of 15-20%, if that stock doesn't recover VERY soon to get that yield down to 7-9%, the div will be cut or suspended and the stock will plummet further.

Just be careful. CVX probably only oil major I'd be comfortable with. Stay away from the frackers. The refiners deserve a look, but I haven't studied them in a while, but VLO is usually the best operator.

Bottom line: Be very careful in the energy space and don't be scared to take some gains on rips. You'll get a chance to buy them back. I was high on utilities but now with folks unable to pay bills, it may not be a good idea.

 

[RBDog82]

Not on a loan, it's not considered income or a withdrawal providing you pay it back in within the terms given. Let's say you get laid off, and you can't pay it back through payroll deductions, then yes, you will have to pay a penalty and income tax as if it's a withdrawal and maybe even worse for all I know. You better read up and not just take a message board strangers advice. Google is your friend.

I know I couldn't pay extra payments or any on the principal unless I paid off the full balance owed. They would only take my monthy payments through payroll deductions.

My statement was in reference to a withdrawal, not a 401k loan.

 

[TheStateUofMS]

I'm wondering if they IRS won't put a rule out against that. I would think a lot of folks would do some conversions.

 

[TheStateUofMS]

I mean I did the math and unless 20,000,000 people took out the full $100,000, I don't think the market would notice. Everyone in a 401k isn't in 100% equity funds.

 

[GloryDawg]

An old way of getting around the Income limits for a Roth IRA is to purchase a traditional IRA which has not Income limits and then convert it to a Roth. When you do that they do waive the 10% penalty but you have to pay the taxes. Now would be a good time because you can spread those taxes out over three years.