How To Borrow From Your 401(k) If You Have To
To assist Americans with pandemic-related spending emergencies, the CARES Act has temporarily made it easier for families to tap into their IRAs, 401(k)s, or similar retirement accounts. Even if you can now borrow or withdraw from your retirement reserves, that doesn’t mean you should. Still, some families are facing urgent needs right now. How do you take from your 401(k) today, and safeguard your future?
Step one, if you take assets out of a retirement account, take no more than is absolutely essential. Obviously, the more you spend today, the less you’ll have tomorrow. Plus, you’re sacrificing not only current savings, but the tax-sheltered returns those savings could have earned.
Step two, create a plan for paying yourself back, and make it one you can put on auto-pilot. If you must instead take deliberate action to replenish the funds, let’s face it, it’s far less likely to happen.
For example, if you have to tap into your 401(k) account, consider borrowing from it instead of taking a hardship withdrawal. With a 401(k) loan , you should be able to establish automatic re-payments out of your paycheck. In contrast, under the CARES Act, paying back a withdrawal is optional, you’ll probably have to write periodic checks to do so, and recovering the taxes paid can get complicated.
Once the crisis has passed, another auto-pilot hack is to increase the amount you’re having automatically directed into your retirement account – especially if it will score you additional matching employer funds. While it’s never easy to decrease your take-home pay, it’s easier than having to manually set aside the same amount once the money is in your hands.
I’ve barely scratched the surface here, with scores of additional scenarios. For example, what if you lose your job entirely, or your company plan doesn’t allow for loans?
Come what may, remember this: The government is making it easier to borrow and spend right now, but they are NOT offering significant guidance on how to do it prudently. The “prudent” part is on you. Consulting with a reputable financial planner before you proceed can pay for itself in the long run.
John A. Frisch, CPA/PFS, CFP®, AIF®, PPC™ founded Alliant Wealth Advisors in 1995 and has over 30 years of experience as a financial professional. In his free time, he’s an avid long-distance runner, a sport that requires discipline, patience and vision. John applies these same skills to his professional pursuits: He helps families and retirement plan sponsors adopt a patient, disciplined approach to overcoming financial challenges and reaching their distant goals along a clear path. Learn more at www.alliantwealth.com.