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Should Cash-Strapped Clients Tap into Retirement Assets Early?


Even though many people's sources of income disappeared, bills didn't. To cope, some clients are thinking of accessing their retirement assets to make ends meet. How should you advise them?

Apr 20th 2020
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Back on New Year’s Day, no one thought they would be losing their job in March. Even on Valentine’s Day, it wasn’t a serious possibility. Then the country shut down, closing non-essential businesses. They promptly laid off employees, especially across the restaurant and hospitality industries. It happened at all levels. Some executives took steep pay cuts.

Even though many people's sources of income disappeared, bills didn't. To cope, some clients are thinking of accessing their retirement assets to make ends meet. How should you advise them?

Simply put, tapping into retirement assets now is a bad idea. That being said, be aware they will probably do it anyway. They might see it as the easiest and most convenient option. You need to make the case why it’s a last resort.

Suppose they had $10,000 in their retirement account on New Year’s Day. Let’s assume they are invested in the stock market. They see $10,000 as the account value on their year-end statement. As of April 20, the DJIA is down 15 percent YTD. If your client says: “Times are tough, I’m withdrawing my $ 10,000,” they might as well hear a voice saying: “If you really want it, I’ll give you 85 cents on the dollar or $8,500.” That’s the current value. They might intend to replace the money, but it’s highly unlikely they'll be able to. First, it took a long time to save, a little at a time. Second, it’s unlikely 2020 will yield them big bonus checks or high commission income.

The government knew this would probably be necessary. They’ve made it easier, or at least less painful. The CARES Act includes the following options:

  1. 401(k) Loans: The rules were: $10,000 or 50 percent of the balance, whichever is greater. The max was $50,000, and you have five years to repay the loan. Now, the CARES Act allows for 100 percent of the balance, up to $100,000. The repayment period is extended to six years. Loans might sound attractive, but you don’t pay rent or car payments with shares of stock. You are selling securities to raise cash.
  2. 401(k) Distributions: Previously, people under 59½ who withdrew money paid taxes as ordinary income on the amount, plus an additional 10 percent penalty for early withdrawal. The CARES Act eased the pain. People impacted by coronavirus, including people under 59½ who became unemployed, can withdraw up to $100,000 from their 401(k) plans without a 10 percent penalty. They can either choose to pay the entire tax bill in 2020 or spread the bill over three years.
  3. IRA Account Distributions: Many people have IRAs. Others rolled over assets from a retirement plan at a former employer into an IRA. These accounts typically don’t allow for loans. Clients who access these funds initially treat it as a distribution. It’s taxable in the current tax year. The government is allowing people the option of replacing the money, up to three years later. In that case, they would file an amended 2020 tax return, because the distribution would be considered a loan instead.

Outside of these, your clients may be wondering if they have other options.

This might seem easy, but they are taking retirement assets off the table at a low point in the stock market. No one knows what the future holds, but here’s an obvious point: Those assets won’t be available at retirement because your client is spending them now.

They might own insurance products that build cash value. Whole life insurance and annuities are two examples. Depending on their policies, they may have the option to borrow or withdraw part of their cash value.

In the end, your clients will make their own decisions. As their accountant, though, you can advise them on the pros and cons of tapping into their retirement assets. 


  • Cash when you need it. You need money to pay bills. It’s a source you can access quickly and easily.
  • Relaxed penalties. The government is letting people access money, waiving the 10% penalty for early withdrawal.
  • Longer repayment periods. You have an opportunity to put the money back, treating it as a loan, not a distribution.


  • Accessing money means liquidating securities. The stock market is down 15 percent year to date. You are getting less money for your equities than they were worth on January 1.
  • Loans are unlikely to be repaid. You are borrowing or withdrawing a large amount you built up a little at a time over many years. A loan not repaid would become a distribution.
  • Smaller base of retirement assets. You have been setting aside money for retirement so it would grow over time, providing a sum of money to fund your retirement. That pool of money has suddenly gotten smaller. If your assets grow over time, they are now starting at a smaller base.

Here's the bottom line: Yes, your client needs money now. However, retirement assets are a resource. They should be considered as a last resort, not the first.

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