Thinking about borrowing from your 401(k) to pay for expenses? Here's what to consider

Even as the economy slowly cracks the door open and tiptoes back to pre-coronavirus activity, many of you are feeling the aftershocks of our national shutdown. And since only 40 percent of Americans can cover a $1,000 emergency with cash, people are robbing their retirement accounts—and their financial futures—just to get by.

About half of Americans have withdrawn, or plan to withdraw, money from their 401(k)s or IRAs to pay for expenses related to the COVID-19 pandemic.

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As a retirement and wealth-building coach, this makes my head spin! I’m outraged and heartbroken that a lack of planning has led so many people to make a decision that could ruin their retirement dreams.

In an attempt to “help” hurting people, the federal government created new legislation in the CARES Act that made it easier to take money out of retirement accounts. Now, you can withdraw up to $100,000 for COVID-related financial losses and the 10% early withdrawal fee is waived. But the devil is in the details, people! You’ll still pay income taxes. And more importantly, raiding your 401(k) is a bad financial game plan.

I’m outraged and heartbroken that a lack of planning has led so many people to make a decision that could ruin their retirement dreams.  

Investing money for retirement is like planting a tree. You must wait patiently to see the effects of growth. But draining your 401(k) early is like tearing that tree up by the roots, undoing all the progress you’ve made so far. You’re erasing valuable years of saving—and compound growth—you may never recover.

There are better ways to pay the bills now, so that you can still retire with dignity later. Here are a few ideas:

1. Go into conserve mode - Make a budget! Cut out all unnecessary spending, and only fund the Four Walls—food, utilities, shelter, and transportation. Get lean and stay focused. 
2. Make extra money - Now’s the time to get scrappy and creative. Start delivering food on nights and weekends. Brainstorm ways to turn your skills and resources into an at-home business. Generate cash instead of borrowing from your future self.
3. Sell some things - Is it time to clean out the garage? Or sell those golf clubs or designer bags you don’t need? You’ll be surprised at how many people on Facebook Marketplace want to buy your stuff!
4. Negotiate with your lenders - Many people understand the pressure is real. If you’re in debt, don’t wait for your creditors to call. Call them first! Negotiate a plan that will buy you some time until you’re in a more stable position.

There’s an old saying, “When you’re at the end of your rope, tie a knot in it and hang on.”

This is an uncertain and difficult time, but don’t let short-term panic destroy your long-term success. The economy will recover. But your 401(k) may not if you make a bad decision today!