When cash is tight, should you borrow from retirement?

Millions of Americans find themselves strapped for cash with reduced work or lost jobs as the coronavirus pandemic roils the economy with no end in sight. The Coronavirus Aid, Relief and Economic Security (CARES) Act passed in late March offers some respite with the promise of direct checks of $1,200 for individuals ($2,400 for couples) with an additional $500 for each child, and expanded unemployment insurance benefits. It also opens up a bigger cash window by waiving the 10% penalty on withdrawals of up to $100,000 from 401(k) accounts by those below 59.5 years of age. Earlier rules required those aged less than 59.5 years to pay a penalty on withdrawals. 

Closeup of a hand holding an empty wallet over a desk strewn with bank statements, credit cards and a calculator.

Attractive as it might seem, tapping retirement savings is fraught with risks that need careful consideration, according to experts at Wharton. Those premature withdrawals will not just erode individuals’ retirement nest eggs: Those who lose their jobs after they withdraw from those retirement funds will have to either repay that amount within three years or pay additional taxes. Meanwhile, despair on the job front is growing, with jobless claims nearing 17 million for the last three weeks, and the unemployment rate projected to rise from the current 4.4% to more than 10% by the second quarter.

“Withdrawing assets from retirement plans should be a last resort, done only after using up the household’s emergency funds, taking a bank loan, or borrowing from family if possible,” says professor of business economics and public policy, and executive director of the Pension Research Council at Wharton Olivia S. Mitchell. “It has tax consequences, and it may lead to a much poorer retirement.” 

Read more at Knowledge@Wharton.