Episode #23: 5 Tips to Manage Your 401k During the Coronavirus Pandemic

Manage your 401k

April 7th, 2020

What do you do to manage your 401k when the economy is diving headfirst into a recession? The Coronavirus has forced itself to the forefront of our minds day-in and day-out—there’s no escaping its reach. You may be getting nervous about the money you’ve allocated for retirement. Or you’ve found yourself short on cash as you sit at home, waiting to return to work. In this episode of Making Finance Fun, I’ll share 5 things you can do to manage your 401k.

Outline of This Episode

  • [2:16] What should I do with my 401(k)?
  • [2:52] Tip 1: Know exactly how much risk you’re taking
  • [11:40] Tip 2: Keep contributing if you can
  • [16:22] Tip 3: Position yourself for the recovery
  • [20:04] Tip 4: What to do If you have to take a hardship withdrawal
  • [26:55] Tip 5: Know the rules if you take out a 401(k) loan

#1: Know the risk you’re taking with your investments

If you’ve been watching your 401(k) take a nosedive and it’s left you unable to sleep at night—maybe you aren’t the aggressive investor you thought you were. That’s 100% okay. Extreme drops in the market are an indicator of your risk tolerance. If it’s low, it may be time to re-think your strategy, which I talk about a little bit more in this blog post. The bottom line is, assess your risk tolerance and if your current stock and bond allocations don’t align, make some changes until they do.

#2: Continue to Contribute to your 401(k)—if you can

If you’re lucky enough to find yourself still employed—and not one of the 3 million people to have filed for unemployment—you may be tempted to stop paying into your 401(k). If you need the extra cash and can’t keep contributing, it’s understandable. But if your employer matches your contributions, it’s retirement money that you’ll be losing out on. Listen to the episode as I talk about contribution limits for yourself (and your employer) and how it applies if you’re self-employed. 

#3: Position yourself for a market recovery

This time is different” is something we all say at the beginning of a recession—and it’s true. The beginning is always different but the end is always the same. A drop in the market has historically ended with an eventual rise back to normalcy. Dial-in your risk tolerance, and then reallocate your assets accordingly. The caveat will always be that we don’t know (and can never gauge) what will happen moving forward, but there’s reason for hope. 

#4: What to do if you have to take a hardship withdrawal

I’m not advising for or against taking a withdrawal, but there are a few things you need to consider before you withdraw money from your 401(k). There are 6 criteria you must meet to qualify for a withdrawal:

  1. You’re dealing with unexpected medical expenses. 
  2. The withdrawal is directly related to the purchase of a home.
  3. If it’s to help pay tuition and/or school expenses.
  4. Payments are needed to prevent eviction or foreclosure.
  5. The money is used for burial or funeral expenses.
  6. The funds are needed to repair damage to your home.

Exemptions are allowed if you’re disabled, have medical debt that exceeds 7.5% of your adjusted gross income, or the court is mandating it to go towards alimony or child support. Before you make a move, you need to know that your 401(k) is protected from creditors and bankruptcy. Think long and hard before opening up yourself to losing that money. 

#5: Know the rules if you take out a 401(k) loan

If you’re at a point where you need to weigh the idea of withdrawing money from your 401(k), take a pause and consider a loan instead. Not all of them allow it, but most do. Typically, you’re required to pay the loan back over a period of 5 years. But any interest you pay during the 5 years goes back into your account.

However, if you lose your job or change employers during this time, one of two things will have to happen. The first is that you’ll have to pay off the entire amount of the loan. The other option is to roll it over to another 401(k). The downside to option #2 is that you will be taxed on it and could also face a 10% penalty if you’re under the age of 59 ½. 

Weigh your options carefully, and do what’s necessary to support yourself and your family through this time. If you have questions—don’t hesitate to reach out to me. For my full take on managing your 401(k) check out the whole episode. 

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