Consequences of CARES Act Retirement Withdrawals

Retirement Plan Consulting

Apr 16, 2020

The Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law on March 27, 2020.  Thanks to the new law, you may be expecting some funds from the federal government by way of a check or hopefully, by direct deposit so you receive it quicker.  What you may not be expecting is easier access to your retirement account.  You can review the rules by clicking here, but this post will focus on the items you should consider before taking a withdrawal. 

While this newfound access to your money may seem tempting, there are two major consequences for you to consider before taking any action.  The first one is the tax impact.  While the IRS is waiving the 10% penalty for people under 59 ½ , they are not waiving the taxes.  Even though they are allowing you to pay the tax burden over 3 years, it is still extra money you would have to come up with each year at tax time.  Unless you have a realistic plan to come up with that extra money or to be able to put the full withdrawal back into a retirement account within the next three years, you should consider withholding the taxes now.  The only major drawback to that is more money coming out of your retirement account.

That leads right into the second major consequence, which is opportunity cost.  The stock market has experienced a significant drawdown over the last two months.  Yes, it has recovered some of it, but we are still a long way from the highs.  If you take money out now, you would be selling your funds at significantly lower prices than you could have sold them for in February.  To take it a step further, you will miss out on the potential gains for that money over the long term if you take it out and spend it now. 

Let’s look at a quick example:

We’ll assume that you are considering a $30,000 withdrawal and would earn an average of 6% per year over time on that money.  Under those assumptions, you would be missing out on the following growth over 5, 10, 20 and 30 years:

5 years – $40,146.77 – You miss out on over $10k in potential earnings

10 years – $53,725.43 – You miss out on over $23k in potential earnings

20 years – $96,214.06 – You miss out on over $66k in potential earnings

30 years – $172,304.74 – You miss out on over $142k in potential earnings

The beauty of retirement accounts is that you have a lot of time for the money to grow.  As you can see in the example above, those earnings can be very powerful over time and taking a withdrawal now would be very disruptive to that.  You have to be very honest with yourself and think about how bad you really need the withdrawal.  Are there places you can cut spending?  Can you get relief on your mortgage or rent?  Will the stimulus carry you through for a while?  If you have exhausted all other resources and this is all that is left, I would at least consider the points in this post and discuss your situation with a professional. 


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