Share:

If you’re like most Americans, you might not have a hefty savings account to fall back on in times of duress. Therefore, when hit with high medical bills or emergency home repairs, you might be tempted to cash out your retirement account or 401(k). The CARES act allows those affected by COVID-19 to do so without facing penalties. However, this is still a big decision that could have consequences down the line. If you’re on the fence, use this guide before speaking with an accountant.

The Pros

When your money is sitting in your 401(k), not only are you essentially barred from using it until you retire—but the company holding your money gets to take some for themselves. Due to record-keeping and other administrative tasks, they usually take about 2% a year in service fees. Cashing out the money will save you from paying these fees. 

Also, while you won’t need to pay taxes on the money going into your retirement account today, you will have to pay them once you retire. Since tax rates will likely be higher then, it may make more sense to remove the money and get the tax payments over within the present.

Another reason to withdraw your money is that without doing so, your access to the funds is harshly restricted. The government is in control of your funds while you await retirement, and if you try to borrow money from the 401(k), you’ll end up paying taxes on it twice (once when you remove it, and once when you use it again during your retirement). If you borrow money, you cannot use it to begin a business or buy a second home. By simply cashing out your 401(k), you won’t have to return the money, there are no rules on how you must use it, and you can avoid racking up credit card debt to pay for whatever you’re spending it on. 

The Cons

accountantOn the other hand, removing your retirement savings early might not be in your best interests. First and foremost, you’ll have to pay the penalty for withdrawing early—around 10% on top of the regular income tax if you are under the age of 59 1/2. Plus, if your 401(k) money was being invested in individual stocks, and the market has taken a turn for the worst, you may end up with less money than if you’d waited. You’ll also be left with the duty of finding a new place to safely store your retirement savings, which can be stressful. Since most savings accounts aren’t influenced by investments, you might end up with less money when you finally retire.

 

If you’re still confused about which path is best for you, turn to The Callen Accounting Group, PLLC of Mountain Home, AR. When you meet with one of their skilled accountants, you can breathe a sigh of relief, knowing your financial future is headed in the right direction. From payroll services to tax planning, their team can handle a wide range of your monetary needs. To learn more about their services, visit them online. You can also call (870) 425-6066 to set up a consultation with an accountant.

tracking