The coronavirus pandemic has prompted the federal government to loosen the rules for tapping into retirement savings, raising questions from 401(k) account holders who wonder whether they should touch their retirement during this time of economic uncertainty.
The CARES Act temporarily loosens the rules on hardship distributions from retirement accounts, giving people affected by the crisis access of up to $100,000 of their retirement savings without the usual 10% penalty. The deadline to take advantage of this provision is Dec. 31.
The act also doubles the amount 401(k) participants can take in loans from an account for the next six months to either up to $100,000, or 100% of the vested account balance. (One notable exception to this: IRAs, which don’t permit loans.)
And while Baton Rouge businesspeople are eyeing these provisions, some companies hit hard by the pandemic—such as Amtrak and Marriott International—are cutting their 401(k) matches.
Local financial advisers and brothers Andy and Bill Bush of Horizon Financial Group have set out to answer some of the most common questions they’ve been fielding through their podcast, “Inside the Plan with the 401(k) Brothers.” Here’s their advice, which has been condensed for Daily Report.
Is it the right time to take advantage of one of the new CARES Act provisions? What circumstances might force you to do this?
Andy: I would deter anybody from taking out a loan if it’s not absolutely necessary. But job loss is a big thing. Generally, it’s important to have a firm understanding of what your monthly expenses are and what they’ll be going forward before taking out a loan.
In the meantime, what should I do with my 401(k)?
Bill: That depends on where you are in your working career and how old you are. I talked to a participant who’s probably got about 25 more years of work ahead of them, so they should probably do nothing.
Andy: Even once you retire at 65, there’s a big chance that you’re going to have 20-25 years of life after that, and you’ll still need money when you’re 85 to pay bills and part of your portfolio will still need to grow. Of course, some folks are going to be losing jobs or having their hours reduced, so those things will probably warrant a one-on-one conversation with your financial adviser or CPA.
Should I move my 401(k) account to bonds or cash, or should I rebalance?
Andy: Rebalancing actually makes sense. If you scrape off a little from your bond levels and put them into your stock-related investments, then you’re buying those stock-related investments on the cheap compared to what they were a month and a half ago. However, to me, moving to bonds or cash means you’re using a very short-term horizon for your investing philosophy.
I’m saving the maximum amount in my 401(k). Should I stop or lower my contribution for a while?
Bill: At any time in the year, you can drop to zero, and that doesn’t matter if there’s a crisis going on or not. I talked to a participant last week whose hours were being reduced, so it absolutely made sense for them to drop to zero.
Andy: I would also tell folks that if you’re able to, you could even stand to increase your contribution. This is the time where if you’ve been fairly conservative, you could maybe dial a little more aggressive—not full-blown, necessarily—but that’s definitely a conversation to have.