4 Tips for Managing Your 401(k) During A Recession

Author: Siân Killingsworth / 22 Sep 2020 / 401(k) Plan Information

Recessions can bring financial hardship, whether it’s unemployment, rent increases, sudden alimony and child support payments due to divorce, or the increased price of goods. It can be tempting to think of your 401(k) as “a big pile of money sitting there, ripe for the taking” – particularly if you’re facing rising household debt and the pressure of job loss. Before you throw away future security for greater peace of mind today, consider all your options for managing a 401(k) wisely during a recession.

Manage Your Minimum 401(k) Distributions

If you would normally be required to take minimum distributions because you are over 70.5 years old, you can now forgo the distribution and let it grow another year, so you won’t have to sell your investments at a time of lower return. Reducing the distribution can also reduce your income tax liability for 2020.

Pull Back What You Add from Each Paycheck

Another option to increase the amount of cash you have on hand during the recession is to pull back on what you add to retirement from each paycheck. While you are legally allowed to contribute up to $19,500 (or $26,000 if you’re over 50) into your 401(k) account, you don’t have to contribute that much if it doesn’t suit your needs and goals right now.

You want to at least contribute enough to get the maximum employer match, as the matching funds are not counted toward the IRS limit. Before you adjust, think about what you might need.

How much you’ll need in retirement depends upon when you plan to retire, how much of your current income you’d like to replace, and how much you trust that Social Security funds will be available. A good rule of thumb is to invest enough to get the employer match and bump it up 1-2 percent a year. If there is no employer match, you can start with the IRA contribution limit of $6,000 a year as a minimum guide.

Consider Loans and Hardship Withdrawals Carefully.

If money is extremely tight right now and you’re under 59.5 years of age, you may contact your plan provider to discuss the possibility of taking an early withdrawal from your 401(k) distribution.

In 2020, the 10% penalty for early distributions has been waived. You can take out up to 100% of your vested balance up to $100,000. Payments can be delayed for up to one year, but you’ll want to pay yourself back within three years. The taxes can be evenly spread out over 2020, 2021, and 2022, but you can claim a refund on those taxes if you repay yourself in full.

Most people who borrow from their retirement accounts end up with an outstanding balance after five years. You could be on the hook for a huge tax liability and a penalty charge while you’re still struggling. Worse yet, you won’t be making new contributions while the balance is outstanding, so the value of your plan shrinks considerably during that time.

Talk to a Retirement Expert

There is no substitute for professional financial advice if you’re worried about your present and future. A diversified, long-term strategy is the best way to weather a recession, as time has proved. Chart your course, but stay your course.

Ask your employer how to get in touch with a financial advisor through their plan, as this conversation can take place at no cost to you. Ubiquity is a low-cost 401(k) plan provider that caters to the needs of start-ups, small businesses, and solopreneurs. Talk to us today for affordable, flat-fee plans.