3 401(k) Mistakes to avoid during the COVID-19 crisis
Millions of Americans have already been impacted financially by COVID-19, and if you're one of them, that could change the way you plan and save for retirement. But the more careful you are with your 401(k), the less likely you'll be to make a mistake that hurts you in the long run. Here are three specific 401(k) moves it pays to steer clear of.
1. Taking an early withdrawal when you don't absolutely have to
Normally, taking a 401(k) distribution prior to age 59 1/2 results in a 10% early withdrawal penalty. But thanks to the CARES Act, which is designed provide relief during the COVID-19 crisis, you can now remove up to $100,000 from a 401(k) penalty-free if you've been negatively impacted by the pandemic.
That's a tempting offer at first glance. After all, that money is yours, and if you can simply tap your retirement savings, you won't need to go through the motions of applying for a loan to keep up with your bills. But while it's OK to take a 401(k) withdrawal if you're really hurting financially and have exhausted all other options, make sure it's truly your last resort. If you're out of work, for example, you may manage to get by between unemployment benefits (which should now be $600 higher per week thanks to the CARES Act), your stimulus check, and leeway from your lenders and service providers. Once you remove funds from your 401(k), you also lose the opportunity to invest that money for added growth, so a single withdrawal could wind up costing far more than the sum you remove in the long run.
2. Pausing contributions due to stock market volatility
The stock market has been volatile over the past month and change, and so you may be inclined to stop funding your 401(k) until things settle down, even if your paycheck has held steady. But remember, the money you invest in your 401(k) isn't for short-term needs; it's for the future. And if you're many years away from retirement, the way the stock market performs in the next few months probably won't matter all that much in the grand scheme of a decade or longer. As such, it pays to keep contributing to your 401(k) if you have the means. If you fund a traditional 401(k), you'll get a tax break out of the deal, and that's something you really shouldn't pass up if you don't have to.
3. Halting contributions if your employer match goes away
Many companies are hurting financially right now, and some are implementing cost-cutting measures to ease the pain. Those measures could include putting a stop to 401(k) matches for the time being. If your employer puts matching dollars on hold, you may be tempted to stop funding your 401(k). But that's a mistake that could cost you down the line.
While getting free money for retirement is always nice, the reality is that not every employer offers a match. But it still pays to fund a 401(k), even if you're doing so completely on your own. As mentioned previously, there's instant tax savings to be reaped if you save in a traditional 401(k). Furthermore, if you pause your own contributions and start getting used to the higher paycheck that produces for you, you might really struggle to resume those contributions once your employer match is reinstated.
The more savvy you are in managing your 401(k) during the ongoing crisis, the more long-term financial security you'll buy yourself. Avoid the above mistakes so you don't wind up regretting them well after the pandemic is over.