As states across the country continue to struggle with reopening their economies, many families are still facing financial setbacks due to the coronavirus pandemic. While some may consider withdrawing funds from a 401(k) plan, experts advise to exhaust other resources before tapping into retirement accounts. Financial professional AnneMarie H Hamilton, VP Investment & Insurance Services of Orange County’s Retirement & Investment Services conveniently located at Orange County’s Credit Union, is providing guidance on considerations consumers should keep in mind if contemplating withdrawing money from retirement accounts, as well insights on the impact of the 2020 Cares Act, recommendations on any changes to consider and how to best manage 401(k) plans during the pandemic.

Before tapping into a retirement account, the financial professional recommends exploring other resources first. “For bills that are due right away, the first source of money that should be used are emergency funds that individuals have in their checking or savings accounts,” shares Hamilton. “For those without emergency funds, there are assistance programs that the government and organizations, such as utilities and credit cards, are offering to eliminate late fees, defer payments and offer other resources.”

The financial specialist advises that individuals considering withdrawing funds from their 401(k) plans, should not move forward if under the age of 59 ½ as there is a 10% early withdrawal penalty, in addition to income tax on the distribution. Another consideration is that requests may also be denied as not all 401(k) plans allow for withdrawals or loans while an employee still works for their company. Additionally, many may also miss out on investment returns they could have earned if money was left in the account.

With that, the new 2020 CARES Act contains a few key provisions to assist retirement plan participants and IRA account holders who are struggling financially. For qualified individuals, the CARES Act waives the Code Section 72(t) additional penalty tax on early (pre-age 59 ½) withdrawals up to $100,000 from a retirement plan or IRA. An individual qualifies for the exemption in the following circumstances:

• They are diagnosed with COVID-19
• Their spouse or dependent is diagnosed with COVID-19
• They are experiencing adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary.

Coronavirus-related distributions under the Act can be included proportionally in the qualified individual’s taxable income over a three-year period. The Act also allows a qualified individual who takes a coronavirus-related distribution to repay that amount tax-free back into the plan within three years of taking the distribution. Such repayment will be treated as a rollover contribution.

While experts do not recommend withdrawing from 401(k) plans if possible, there are opportunities to reevaluate your plans and make changes, as appropriate. “If you can stomach the volatility in the stock market, now could be a great time to crank up your contributions in equity funds and take advantage of dollar-cost averaging,” said Hamilton. Dollar cost averaging is a well-known investment strategy that seeks to reduce volatility by purchasing securities in fixed dollar amounts at regular intervals, regardless of what direction the market is moving and regardless of the share price. Using this strategy, more shares are purchased when prices are low, and fewer shares are bought when prices are high. By investing a set amount over time, investors take advantage of the rise and fall of prices in the market to smooth returns. Dollar cost averaging takes some of the guesswork out of investing and helps manage the risk of investing a large amount in a single investment at the wrong time. An investor should consider their ability to continue purchasing through fluctuating price levels. Such plan does not assure a profit and does not protect against loss in declining markets.

Conversely, if facing a layoff or reduction in pay, decreasing the contribution amount temporarily may be a necessity. For those with a low risk tolerance or short time frame until needing to withdraw money, most 401(k) plans offer a diversified array of investment options such as bond funds and stable value funds. Bond funds invest in government or corporate bonds and they typically pay a monthly dividend which can be automatically reinvested. Stable value funds aim to preserve principal with predictable returns.

Lastly, Hamilton shares that the best way to preserve 401(k) plans during the pandemic is to keep investing. “People are often tempted to put less into retirement savings or withdraw from their accounts when an economic downturn occurs,” shared Hamilton. “But, stopping the contributions to your retirement savings will have a negative effect on your retirement plan. Pulling money out of a 401(k) when stocks are low means you will most likely miss out on future gains.” During the last recession, people who did not withdraw from their 401(k) plans and instead kept saving did better than those who decided to or had to withdraw from their retirement accounts