These are uncertain times, at best. And for those of you diligent enough to be saving for your retirement, the volatile stock market has become particularly unsettling. History has shown the best course of action is to take no action at all, so if that’s a viable option, you may want to forget your password for a few months, focus on staying healthy, and revisit your retirement plan assets at a less humbling time. However, we recognize that isn’t a realistic option for everyone. Should you find yourself in a more dire situation, here are the options as they pertain to your 401(k), as well as the various points to consider before making any short-term decisions.
If immediate cash flow is more important to you than long-term savings, you should have an easy way to change the amount you contribute each pay period to your retirement plan.
If your plan allows it, you may borrow from your account balance and repay yourself through loan repayments via a payroll deduction. If your employment terminates, most plans permit loans to be taken soon after separation of employment.
If you find yourself in a time of financial hardship (defined as an immediate and heavy financial need—medical expenses, burial expenses, to avoid foreclosure on the primary residence), you may be able to withdraw funds from your plan without facing tax penalties. While the CARES Act provided specific guidelines for coronavirus-related hardships, it's crucial to check with your plan administrator for current hardship withdrawal options as they may have been updated or expanded based on more recent legislation, like the SECURE 2.0 Act. In the meantime, hardships are only available if the plan allows it—or your employer amends the plan to allow them—and the plan administrator must approve an application with proof of hardship.
Some plans offer an opportunity for savers to withdraw from their retirement plan even if they cannot satisfy the hardship standard while they’re still employed by the business. There may be an age requirement to access funds from a safe harbor plan, so be sure to check your plan to confirm whether you qualify for this type of withdrawal.
Please note that there is some talk of forgiving certain penalties in light of the current situation. We will keep you updated on any relevant changes.
Vestwell is not a law firm or tax advisor. Participants may wish to consider hiring their own professional before making any changes to their retirement plan, as there could be tax consequences and other adverse impacts on their retirement plan.