Should I dip into my retirement savings?

Many people who have had their income adjusted may be panicking and looking for other sources of cash to pay the bills. In fact, 3 in 10 Americans said they took cash from retirement accounts1 during the early months of the pandemic, and the majority of those did so to cover household expenses and groceries, according to a MagnifyMoney survey.

Unfortunately, the long-term cost of this tactic can reverberate for years to come.

Ongoing, consistent contributions and a growing balance can make a significant difference in the size of your retirement funds in the years to come. Therefore, if you withdraw a portion of your account and take a long time to replace it (or never do), it will have a long-lasting, negative impact.

Before you resort to draining your retirement savings, here are some alternative ways to consider when making ends meet during times of financial crisis:

Reduce your expenses

In pandemic times, it’s likely you’re already spending less in certain categories, like travel, recreational outings and commuting. Watch out for other sneaky expenses like streaming or other recurring subscriptions or splurging on a lot of take-out. Be frugal, shop deals and use coupons on groceries. And give your cell phone, cable and insurance providers a call to see if there are any promotions or programs that may lower your bills. 

Look for different streams of income

Many Americans are picking side hustles and gig work if they have some free time, so that could be something to consider if you need to generate some cash. You could also raid your closets, basement and garage, and try selling items you no longer use. If you receive stimulus payments or any other windfalls, try to use those lump sums to cover basic needs first.

Work with creditors and tap into relief programs

Many creditors and lenders are allowing forbearance and other programs for people who are affected by COVID-19 – but you have to ask. Such programs give you a period of time in which you can skip paying bills without penalty, usually three months to start. Other lenders might offer you a reduced minimum payment or lower your interest rate on a temporary basis. Check your creditors’ websites, or just call and ask about COVID relief options.

Use your emergency fund (if you have one)

That’s what it’s there for. If you’re fortunate enough to have some savings set aside, uncashed bonds or even buckets of loose change, now is the time to tap into those options. Then as soon as you are able, replenish the funds so that they are available to you should another financial setback hit in the future.

Consider borrowing from your home equity or refinancing your home loan to reduce monthly bills 

If your credit is strong and you have ample equity in your home, you might be a good candidate to borrow funds via a home loan program. With a home equity loan or line of credit, there is some risk in that you are putting your home on the line if you have trouble paying the loan back in the future. With a refinance, you may have the opportunity to lower your monthly payments and/or take cash out, but if you’re already far along into your mortgage, it might not be the wisest move. Speak to a home loan professional to run the numbers for you to see if either program is viable for you.

Borrowing to get through a rough patch or to consolidate high-interest debt can work to your advantage, but only if you have a good plan in place to afford that new monthly payment. Of course, it helps if you can qualify for the lowest interest rate possible as well as other favorable terms.

If you still decide to borrow from your 401(k) or other retirement accounts, at least know the rules

Unfortunately, the deadline to borrow up to $100,000 from an eligible retirement plan with favorable tax treatment from the IRS via the CARES Act has passed.2 However, you may still have the option to take a loan, which you’d have to pay back with interest (usually within five years). Though it seems like a safe route, if you aren’t able to pay back the loan on time, you then may be hit with penalties if you are under age 59-1/2.  The other option is to do a straight withdrawal, but that may incur a 10% penalty, and you’d be responsible to pay the taxes up front. With either of these options, besides the money you stand to lose right away, you’ll also be missing out on potential earnings with your depleted balance.

Don't make any rash decisions

Borrowing from your retirement accounts should always be a last resort. Not only will you incur a loss in the short-term, but by reducing your portfolio, you will earn less over time. If you have no choice but to do it, be sure you speak with your plan provider to understand the details and long-term implications. And as soon as things bounce back, make an effort to replace what you've borrowed, and catch up with your contributions to get back on track.


1.     “3 in 10 Americans Withdrew Money from Retirement Savings Amid the Coronavirus Pandemic—and the Majority Spent it On Groceries,” by Sarah Berger, published in Magnify Money; May 2020 https://www.magnifymoney.com/blog/news/early-withdrawal-coronavirus/

2.     “Coronavirus-related relief for retirement plans and IRAs questions and answers,” IRS.gov https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers

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