Have you thought about using your retirement fund to pay bills? At this point, a lot of people are probably thinking about it. The current health crisis is pushing us deeper into the economic crisis. That means more and more people are struggling financially. Millions have already lost their jobs and businesses are trying to stay afloat.
All of these are pushing more people to dip their hands into their retirement savings. With the new provision included in the CARES Act, this temptation becomes even more pronounced.
Reports reveal that the CARES Act will let people borrow up to $100,000 from their 401(k). And not only that, repayment can be delayed by a year. These terms make it easier to decide and borrow from our retirement fund.
If you are having a hard time keeping up with all your payments, it’s natural for you just want to make it easier. Why not use your retirement fund to make your financial situation better? It makes a lot of sense if you are using your own money anyway.
But the question is, will it really be a wise move? Should you get money from your retirement savings to pay bills?
5 considerations when using your retirement to pay bills
The truth is, you can use your retirement money if you want to. And with the current crisis, it seems like the perfect time to exhaust all resources if it means you and your family can survive.
If you are running out of cash, you can use this to pay for your food and groceries. Or you can borrow money from your 401(k) to pay off debt. If you remove debt from the equation it will be easier to survive this crisis.
Seems like a good plan? But before you go ahead with this, you need to think things thoroughly. There are 5 things that you need to consider before you decide to pay bills using your retirement money.
The first thing to take into consideration is your age. There are penalties involved if you withdraw your money early. But that is not all.
Remember that your retirement fund is for when you retire. Obviously, the present need is more urgent. It doesn’t make sense to keep saving for the future if you will not survive your present circumstances. But don’t be reckless about it.
If you are still young and you have decades to go before you retire, that makes it okay to use your retirement money to pay bills. But you have to ensure that you will commit to repaying it. If possible, contribute more than what you used to. That way, you can compensate for what you lost on the compound interest growth.
If you are near your retirement age, things become more complicated. You only have a few years before you will be needing this fund. If you use the money to pay bills right now, you might not be able to retire on time. Otherwise, your retirement fund will fall short. You can work in retirement, but you want to avoid that as much as possible. So consider that before you withdraw from your retirement fund.
Your retirement plan
Another consideration is what type of retirement plan do you have. The rules, restrictions, and penalties will depend on what type of plan you have been using to hold your contributions. In most cases, the contributions are tax-free. That means the taxes will take effect when you withdraw money.
Other plans will take contributions from taxed income. These are the retirement plans that will not tax your withdrawals.
Make sure you scrutinize your retirement plans so you will know what you will be up against. Although it’s your money, there will be penalties and fees involved in withdrawals. These will be tamed down because of the economic crisis. But these are still worth looking into.
The amount to be withdrawn
The third consideration is the amount that you plan to withdraw. For one, the penalty will depend on the amount that you plan to withdraw. Right now, this is waived. But you need to understand the details before you decide on the amount that you will withdraw.
Of course, you have to take note that any amount that you withdraw will also have an effect on the growth of your retirement fund. And that is a compound interest growth too. So consider that when you are deciding how much you want to take from your funds. Ideally, you have to get only what you need and make it your very last resort.
The purpose of the withdrawal
It is also important to consider the purpose of your withdrawal. Before you take money from your retirement fund, you have to realize that you are trading your future financial security for your present needs. You need to make sure that this withdrawal is worth it.
There are also withdrawals that can be exempt from penalties. For instance, if you want to use it to buy a house, you will not be penalized for it. But if you will be using it to pay bills, then that is not really exempted.
At this time, most of us will be borrowing money to pay their bills. But what bills are these exactly? Make sure you limit the expense to the necessities. These include food, groceries, and other expenses that you need to survive. If it’s not necessary for your survival, don’t use your retirement for that.
This brings debt into a tricky spot. Should you use your retirement money to keep your household debt situation under control? It depends. If you need to get rid of your debt to remove the stress from your life, then go ahead. If it’s vital for your sanity and it will help you be more productive in life, use your retirement money to pay for your debts.
The tax implications
Finally, think about the tax implications of your withdrawal. It was already mentioned that retirement money may or may not be taxable. If your contribution was taken from your gross income, that means it was not yet taxed. It will be subject to income tax if you withdraw it. That tax will be in the form of income tax. The problem with that is it will follow your current income tax bracket. There is a high chance that it will be bigger than the bracket when you earned it.
That is another thing that you have to consider. If that is worth it right now. If you feel that it’s okay to lose more because of the income tax bracket, then go ahead and borrow money from your retirement fund.
Other sources of cash to pay bills
If you have gone through all the considerations and it seems like it’s not justified to use your retirement fund, it’s okay. There are other ways to get the money to pay bills.
Obviously, you cannot rely on your saving alone. According to reports, the savings of low-income Americans will only last three months. Almost half of them said it would. But no matter how much you lessen your spending, your savings will still run out. Even if you spend only on the basic necessities, it won’t last forever.
This means they need to find ways to boost their cash fund. Otherwise, their families will have no means to pay for their needs.
There are three sources of cash to help pay bills.
The most immediate is to sell things you have around the house. If you have an extra car, sell your car. You should be able to get a substantial amount from selling it. But don’t expect it to be easy to sell big-ticket items right now. People will probably be holding on to their money.
You might have better luck selling smaller items. If you have things at home that you are not using, sell it online. Sometimes, what you think is junk is actually something that another person has been searching for. Any amount that you get from the sale can be used to pay bills.
Another option is to earn more. Even if you are not in danger of losing your job, it will be better to find another source of income. This will not just boost your monthly cash flow. It will also secure your finances. If something goes really wrong and you lose your primary source of income, you can rely on this second source.
So what can you do to earn more? A great option is to find an online source of income. Get freelancing jobs. Right now, companies are going online to keep the business going. They will need remote workers to help. Take advantage of this.
You can also set up your own online business. If you can make baked goods or other products you can sell online, use your talent. Capitalize on it. Any amount you earn can be added to your dwindling cash flow. It will be easier to pay bills.
Finally, you can also opt to get benefits from the government. They usually have unemployment benefits that you can avail of. If your employer lets you go, they usually have a separation package that you can use to help get started. Make sure that you know what you are qualified to get. Any cash amount will really go a long way. At the very least, it will give you a couple of weeks of peace of mind. You know that for now, you can pay bills. It will clear your head so you can find new ways to get the cash you need to survive the crisis you are in.