Brainstorming and evaluating options is something we do a lot of in the coaching process. Now there is a new option on the table to consider: whether or not to withdraw from your 401k.
The $2 trillion stimulus bill includes a provision that allows you to withdraw a portion of your retirement money penalty-free. You have to meet certain COVID-19-related criteria, which are pretty loose, and you have three years to pay it back.
So let’s look at the pros and then the cons. The pros are that you won’t pay a 10% penalty, it’s cheaper than putting expenses on a credit card, and you have three years to pay it back. For someone looking to borrow money without opening a new credit card or applying for a loan, this can sound like an attractive option.
Now for the cons. First, it’s still debt. If you don’t pay it back in three years you will pay penalties and the government doesn’t play nice when it comes to this stuff. Don’t be fooled by the marketing ploy that it’s a loan “from yourself.” It’s still a loan from the government even though it’s with your money (and even though it’s being called a distribution). If there’s any way to avoid new debt that’s almost always a superior option.
The most significant drawback, and the primary reason I don’t like this provision unless it’s an absolute last resort (such as to avoid bankruptcy) is that the stock market is way down right now. When you sell low and expect to buy stocks again (assuming your portfolio is invested in stocks) in a couple of years, you’re not only missing out on the gains over those years but you are also buying back into the market at a higher price.
In other words, it will be more expensive to buy a smaller piece of the pie. That is the premium most people do not consider when they borrow from their retirement.