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Ask Bob: Should I Stop Contributing To My 401(k) Until The Pandemic Ends?

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The novel coronavirus pandemic is wreaking having on our best-laid plans for retirement.

In this episode of Ask Bob, a reader writes that she has two years until she retires and wants to know whether she should stop contributing 10% of compensation into her 401(k) plan until the pandemic is over and put that money in savings instead.

To help answer our reader’s question, we turned to Denise Appleby, CEO of Appleby Retirement Consulting.

Whether our reader stops contributing to her 401(k) plan depends in large part whether she has an emergency fund to cover at least six months of essential living expenses or not.

If not, now would be a good time for our reader to review her spending plan, trim discretionary expenses, and put those savings in an emergency fund. That might be a better option than stopping pre-tax contributions to a 401(k) that grows tax-deferred. And it would certainly be a better option than using debt, like credit cards, to pay for living expenses in an emergency.

If that trimming of the fat in the budget doesn’t go far enough toward funding a rainy-day fund, it might be worth reducing – temporarily - her contribution to her 401(k) so she can achieve her goal of having six months of living expenses in her emergency fund.

If our reader decides to continue contributing to her 401(k) plan and doesn’t have an emergency fund and then needs to tap her retirement account for living expenses, there are a few things to consider, said Appleby.

Typically, there are restrictions on when you can withdraw money from your retirement plans. Plus, though it may not apply to our reader, distributions will be includible in taxable income and it may be subject to a 10% additional tax if she is under age 59½.

Of course, our reader’s 401(k) plan may allow her to borrow from her account balance. That could be another way to fund expenses related to unemployment, loss of significant assets, or other unexpected major expenditures.

Unfortunately, however, many of the provisions of the Cares Act do not apply to our reader - or at least they don’t at the moment.

One last thought: With two years to go until retirement, now would be a good time for our reader to estimate her expenses in retirement, evaluate her sources of income, and determine whether she has taken steps to manage or mitigate many of the risks she’ll face in retirement. Worst case, working longer can be a good option for those who aren’t yet ready for retirement.

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