Suze Orman ‘was so upset, honest to God’ when the government made it easy to tap your 401(k) in a time of need — she has a big reason why you should never borrow from retirement

Suze Orman ‘was so upset, honest to God’ when the government made it easy to tap your 401(k) in a time of need — she has a big reason why you should never borrow from retirement

It may have seemed like a good idea at the time: allowing Americans to withdraw from their 401(k) accounts without penalty when the COVID-19 pandemic hit.

Many people faced uncertainty about their jobs and finances, and the ability to dip into pension funds provided some much-needed short-term stability.

“I was so upset, honest to God, when the government allowed people to withdraw $100,000 from their account,” said finance expert Suze Orman in a recent interview with MoneyWise.

The author and host of the Women & Money Podcast says that allowing people to detach from their future selves was a big mistake that many will regret in retirement.

“If you can’t pay your bills while you’re earning a salary, how are you going to pay those exact same bills later in life when you no longer have a salary?”

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NOW WATCH: Suze Orman warns cash-strapped Americans not to tap their 401(k)

What happened

The CARES Act, a COVID relief law enacted in March 2020, made it easier to withdraw money from your 401(k) or IRA.

It allowed people to withdraw up to $100,000 from their accounts and have three years to pay it back without the normal early withdrawal penalty and 10% tax payment.

For Americans who needed cash fast, their 401(k) was a tempting well to dip into that wouldn’t otherwise be available.

In the spring of 2020, nearly 20% of all 401(k) withdrawals between April 6 and June 26 were related to COVID, according to CNBC.

CNBC reported that at Fidelity Investments, the largest provider of 401(k) plans in the US, more than 700,000 people withdrew from their 401(k) or 403(b). The median amount was about $5,000, while more than 18,000 people claimed the full $100,000.

And Vanguard’s How America Saves from 2021 report found that more than 7% of people withdrew from a 401(k) or 401(b) — similar to a 401(k) but available to nonprofits — in 2020 .

But Orman says pulling money out of those retirement accounts at the time ended up costing people a lot more in the long run.

“It tells you people didn’t have an emergency account,” he says.

Orman hopes to help people avoid this in the future. He co-founded a company, SecureSave, that aims to help people save in a way that works similar to a 401(k).

Unobvious 401(k) Dip Costs

People who were taking money out of their accounts at the time lost the ability to have that money on their account during the historic market gains that followed the deep lows of 2020, Orman says.

“They were allowed to do it right when the stock market was soaring — skyrocketing, right, so they missed out on a huge amount of growth, especially if they were close to retirement at the time.”

And now that the stock market is in bearish territory and there’s a lot more uncertainty in the economy, rolling that money back into your 401(k) doesn’t seem nearly as appealing.

read more: Trade Up While the Market is Down: Here Are the Best Investing Apps to Seize Once-in-a-Generation Opportunities (Even If You’re a Newbie)

In fact, Fidelity released a new report that showed the average 401(k) balance fell 23% year-over-year due to market volatility.

“People who are working today are seeing their 401(k)s drop 10%, 20%, 50%,” Orman says. “You can mark my bottom dollar that they’re going to stop contributing to their 401(k)s because they’re scared to death.”

Don’t dip into your 401(k) now

Aside from the loss of historical earnings, drawing from your 401(k) can leave you vulnerable if you need to file for bankruptcy, Orman says, because 401(k)s are protected from bankruptcy and can’t be tapped if needed never. declare it.

“So if you’re in a really horrible situation and you’ve got all this debt, you’re underwater on everything and you have to file for bankruptcy to get rid of it, you still have your retirement accounts.”

By making it easy to withdraw from these accounts, lawmakers have allowed many people to jeopardize their financial futures, Orman says.

“If you start taking money out of your retirement accounts just to pay bills and use it for anything other than retirement, you’re going to use all the money that was protected in bankruptcy to pay bills,” Orman says. “Now you don’t have the money to do it.”

But Orman also recognizes the fear that uncertainty brings and how those fears can affect what you do with your money, and right now, there’s a lot of uncertainty.

“I feel for them,” he says. “I have feelings for them. I understand the fear they are going through.”

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NOW WATCH: Full Q&A with SecureSave’s Suze Orman and Devin Miller

This article provides information only and should not be construed as advice. Provided without warranty of any kind.

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