3 Bad Reasons To Take Money Out Of Your Retirement Savings

President Trump recently signed the CARES Act into law. Among the many other things it does, the Act gives you the penalty-free option to take money out of your 401(k) plan or IRA before you are 59½.

“The CARES Act allows individuals to take a loan up to $100,000 from their 401(k),” says Stephen Rischall, a co-founder at Navalign Wealth Partners in Los Angeles. “It also allows individuals to take a coronavirus hardship distribution up to $100,000 from a 401(k) or IRA without any potential 10% early withdrawal penalty, and you’ll have up to 3 years to pay the taxes or replace the funds in the account.”

Just because you’re allowed to take your money out prematurely, however, doesn’t mean you should.

Granted, in cases of true hardship you may have no other choice than to sacrifice your retirement for an urgent need today. Still, it would be unfortunate to succumb to any one of several bad reasons for using your retirement savings now. Here are three of them:

Bad Reason #1: You’re tempted to time the market

Here’s a reason many don’t think about. That’s because it clearly doesn’t fall under the “hardship” category.

Yet “hardship” is a subjective term. While you may fall under the technical definition of “hardship,” there may be other viable options available to you before you need to take the money from your retirement plan.

But the allure of market timing may persuade you to take the money from the plan—because you can—and because you’re just really upset about the state of the stock market right now.

Most of your retirement money is probably in stocks. So, the opportunity to time the market presents itself.

“Withdrawing funds from your 401k or IRA in an attempt to time the market and reinvest when the market bottoms out is a risky move that’s unlikely to pay off for the average investor,” says Liam Hunt, a Toronto, Canada-based financial writer for Sophisticated Investor . “Taking a penalty-free distribution while markets are down will cement an investors’ losses.”

Bad Reason #2: You’re tempted to buy something you’ve always wanted (but don’t need)

Sometimes you’ve just got to go with the hand that’s been dealt to you. Right now, you’ve been dealt a pretty bad hand. Don’t go raising the bet when the cards aren’t there.

For the time being, that means hunkering down and holding back on some of those “special” purchases you’ve been eyeing. Beyond a doubt, don’t let that provocative eye candy lure you into taking money from your retirement savings.

“A bad reason to take money out early is for non-essential expenses or the ‘wants,’” says John Knisley, Financial Planner for Tompkins Financial Advisors in Ithaca, New York. “These types of expenses should be eliminated in times of financial hardships. Taking from your retirement savings early on will only limit your retirement savings later on.”

It takes discipline but if money is tight you’ll need to stop thinking about using your retirement savings to fund “any non-discretionary purposes,” says Brett Tharp, Financial Planning Education Consultant for eMoney Advisor in Philadelphia. “Anything that is a ‘want’ and not a ‘need.’ For example, I want to renovate my bathroom or finish my basement since I’m spending so much time at home.”

Remember, sometimes what is discretionary today is a need tomorrow. You’ll have to discern with careful diligence what is something you can do without and what is something you’re going to require.

“You shouldn’t look at this as an opportunity to get your money out just because you can,” says James T. Meredith, Senior Vice President & Financial Advisor at Hefren-Tillotson, Inc. in Pittsburgh. “Other terrible decisions would include using the withdrawal to fund a vacation, buy a boat, buy a car, or a down payment on a house. If you really truly need a new car, consider that with near lifetime low interest rates, the tax on the withdrawal as well as the loss of potential future returns could very well cost you more than maybe even multiples of the interest on the car loan.”

Which leads directly to the third bad reason.

Bad Reason #3: You’re tempted to pay down debt

Don’t misunderstand. If you want to pay down debt, that’s a good thing—if you can afford to. On the other hand, as Meredith mentions, with interest rates at historic lows, debt may now be an asset. Look into utilizing loans before risking your retirement savings.

“Taking a retirement plan distribution early to pay off debt may be a bad idea,” says Michael Pappachristou, Wealth Advisor at RegentAtlantic in New York City. “There are other alternatives to pay off or consolidate debt and plans can be built out with counselors to address this issue. Funding a large one-time purchase is likely not appropriate either.”

Again, it goes back to determining what you truly need versus what you merely want.

“While it may make sense to take money out of a retirement account early to pay essential bills during the coronavirus crisis, don’t make a premature withdrawal to cover any costs that can wait,” says Christy Bieber, a financial writer with The Ascent based in Lutz, Florida. “If you were planning a home renovation or were going to buy a new car to replace your old clunker, don’t tap into your retirement account to cover these expenses unless your health and safety are at risk.”

But if you do need to replace that old clunker, don’t be afraid to get a car loan to do it. Furthermore, don’t limit this thinking just to automobiles. It’s likely all forms of debt can offer never-before-seen flexibility.

“Many companies are offering temporary relief for their customers right now,” says Nathan Voris, Senior Managing Director of Business Strategy at Schwab Retirement Plan Services in Richfield, Ohio. “For example, before you dip into retirement savings to cover your mortgage, check with your lender. You may have the option to delay payments for a few months.”

Best Advice: Look at the big picture

Ironically, at the same time the CARES Act opens the door for premature retirement plan withdrawals, it also encourages you not to take money out of your retirement plan when you are normally required to.

“The CARES Act temporarily waives the requirement for taking required minimum distributions (RMDs) from retirement plans in 2020,” says Robbin E. Caruso, CPA, CGMA Partner, Prager Metis CPAs, LLC in Cranbury, New Jersey. “This helps individuals avoid additional taxable income for the year 2020 and also means individuals don’t need to remove money from retirement plans at a time when the markets are at a low caused by this crisis.”

What does that tell you about taking money out of your retirement plan?

Perhaps it’s best to follow Hunt’s pragmatic advice. He says, “Withdrawals should be taken only by those strapped for cash who would have liquidated a portion of their retirement savings as a last resort regardless of the regulatory changes in the CARES Act.”

This article was written by Chris Carosa from Forbes and was legally licensed by AdvisorStream through the NewsCred publisher network.