Coronavirus and unemployment: 401(k) tips

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The coronavirus crisis has caused millions of Americans to lose their jobs, what has put a strain on people’s ability to save for retirement.

Since mid-March, 33 million Americans have filed jobless claims as the U.S. shed an unprecedented 20.5 million jobs. And the unemployment rate skyrocketed to 14.7 percent in April, which is the highest level since the Great Depression.

Saving during unemployment could be tricky for the many individuals who may have had 401(k) accounts through their employers.

The first decision people will need to make is whether to keep their money in that plan, or to move it.

Retirement plans, like 401(k)s, tend to have some good investment options that you wouldn’t typically be able to access on your own.

Alternatively, you can roll over your savings into an IRA or cash it out – the latter of which is typically advised against by retirement experts.

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If you do choose to leave your money with your former employer’s plan, most 401(k) accounts do allow people to alter the amount they are setting aside for the account at any point in time. So reducing a contribution could be an option for someone who needs the extra cash in the near term.

Another option for people in need of cash for immediate expenses, is to tap these accounts early – without cashing out.

Typically, money withdrawn from a 401(k) is subject to a 10 percent penalty if it is withdrawn before the owner is 59 1/2 years old. But a provision in the CARES Act relaxed rules on withdrawing money from 401(k) accounts by allowing people to take up to $100,000 from that retirement stash without being subject to the 10 percent penalty, but the funds must be used for coronavirus-related financial needs. Individuals will, however, have to pay income taxes on the money.

For example, a furloughed worker could put retirement money toward a mortgage payment.

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However, experts are cautioning against this. Taylor Hammons, head of retirement plans at Kestra Financial, told FOX Business that the longer people can leave these accounts untouched, the more likely it is that they will recoup the losses incurred from recent market volatility.

Withdrawing during a market downturn -- when account balances are depressed -- is not generally a great option if it can be avoided.

On the flip side, Hammons said it is actually a good time to increase contributions if possible, because individuals can buy when the market is low.

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For those who opt to roll their funds into an IRA, they will assume greater control over their investments and they can generally choose from a wider range of investment options.

If you roll the funds into a Roth IRA, you will pay taxes when you transfer the money to allow for tax-free withdrawals. However, you can also opt for a traditional IRA where the rollover will be tax-free, but withdrawals would be taxed instead.

Cashing out entirely will trigger early withdrawal penalties for those under the age of 59.5, and the money will be taxed as income.

It is estimated that about 55 million Americans had 401(k) accounts as of 2016. The average account balance among people in their 60s, who had worked for more than 30 years, was more than $287,000, according to the Investment Company Institute.

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