What happened

The CARES Act, a COVID relief law that was enacted in March of 2020, made it easier to pull money from one’s 401(k) or IRA.

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

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

In the spring of 2020, nearly 20% of all withdrawals from 401(k)’s, 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 U.S., more than 700,000 people took from their 401(k) or their 403(b) plan. The median amount was about $5,000, while more than 18,000 people asked for the full $100,000 amount.

And Vanguard’s How America Saves report from 2021 found that more than 7% of people withdrew from their 401(k) or a 401(b) — similar to a 401(k) but available to not-for-profit companies — in 2020.

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

“It tells you that people did not have an emergency savings account,” she says.

Orman is hoping to help people avoid this in the future. She co-founded a company, SecureSave, that is aiming to help people save in a way that works similar to a 401(k).

Get advice on your investment portfolio from a certified financial advisor through WiserAdvisor. Fast-track your retirement savings today.

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Unseen costs of dipping into your 401(k)

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

“They allowed them to do that at the exact time that the stock market was skyrocketing – skyrocketing, right, so they missed out on a tremendous amount of growth, especially if they were near retirement at that time.”

And now that the stock market is in bear territory and there’s plenty more uncertainty in the economy, putting that money back into your 401(k) isn’t looking all that appealing.

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

“People who are working today are watching their 401(k)'s go down 10%, 20%, 50%,” says Orman. “You can mark my bottom dollar, that they will stop contributing to their 401(k)'s because they are scared to death.”

Don’t go dipping into your 401(k) now

Beyond missing the historic gains, taking from your 401(k) can leave you vulnerable if you ever need to declare bankruptcy, says Orman, because 401(k)’s are protected against bankruptcy and can’t be touched if you ever need to declare it.

“So if you are really in a horrific situation, and you have all this debt, you're underwater with everything, and you need to claim bankruptcy to get rid of that, you still have your retirement accounts.”

By making it easy to pull from those accounts, legislators have allowed a lot of people to put their financial future at risk, says Orman.

“If you start taking money from your retirement accounts simply to pay bills and use it for anything other than retirement, you're going to use up all the money that was protected against bankruptcy to pay bills,” says Orman. “Now you don't have the money to do so.”

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

“I have compassion for them,” she says. “I have feelings for them. I have understanding for the fear that they're going through.”

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

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About the Author

Lauren Bird

Lauren Bird

Staff Reporter

Lauren Bird was a former reporter for Moneywise.com. Before writing about personal finance Lauren reported and produced for CBC and BBC Radio. Her work has also appeared in The Atlantic.

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