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

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

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

It may have seemed like a good idea at the time: Allowing Americans to withdraw penalty-free money from their 401(k) accounts when the COVID-19 pandemic hit.

Many people faced uncertainty when it came to their jobs and finances and the ability to dive into pension funds provided much needed short-term stability.

“I was so upset, honest to God, when the government allowed people to take $100,000 out of their accounts,” personal finance expert Suze Orman told MoneyWise in a recent interview.

The author and host of the Women & Money Podcast says allowing people to take something from their future selves was a big mistake that many will regret when they retire.

“If you can’t pay your bills while a paycheck comes in, how are you going to pay the exact same bills later in life when a paycheck stops coming in?”

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WATCH NOW: Suze Orman warns poor Americans not to tap their 401(k).

What happened

The CARES Act, a COVID relief law that took effect in March 2020, made it easier to raise money from someone’s 401(k) or IRA.

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

For Americans in need of cash fast, their 401(k) was a tempting pit to dive into that otherwise wouldn’t have been available.

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

CNBC reported that Fidelity Investments, the largest provider of 401(k) plans in the US, had more than 700,000 people using their 401(k) or their 403(b) plan. The median amount was about $5,000, with more than 18,000 people requesting the full amount of $100,000.

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

But Orman says it has cost people a lot more in the long run to get money out of those retirement accounts.

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

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

Unseen Cost of Dipping into Your 401(k)

People who took money out of their accounts at the time missed out on making that money work for them during the historic market gains that followed the deep lows of 2020, Orman says.

“They let them do that at the exact moment the stock market was skyrocketing — skyrocketing, right, so they missed out on a huge amount of growth, especially if they were nearing retirement at the time.”

And now that the stock market is in bear territory and there’s a lot more uncertainty in the economy, putting that money back into your 401(k) doesn’t look very appealing.

read more: Trade up while the market is low: Here are the best investing apps to seize once-in-a-generation opportunities (even if you’re a beginner)

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

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

Don’t dive into your 401(k) right now

In addition to missing out on the historic gains, taking out your 401(k) could leave you vulnerable if you ever need to go bankrupt, says Orman, because 401(k)s are bankruptcy-protected and can’t be touched if you ever need to is declare it.

“So if you’re really in a horrific situation, and you’re in all this debt, you’re underwater with everything, and you have to file for bankruptcy to get out of that, you still have your retirement accounts.”

By making it easy to deduct from those bills, lawmakers have allowed many people to put their financial futures at risk, Orman says.

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

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

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

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

This article provides information only and should not be taken as advice. It comes without any kind of warranty.

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