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Dipping into your retirement savings? Talk to your lender first.



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Peter Dunn, Special to USA TODAY
Published 11:46 a.m. ET Aug. 30, 2020

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Dear Pete,

Both my wife and I have lost our jobs due to the economic downturn. We previously had a household income of $165,000 a year. I’ve been able to get a job for $15 an hour, while I apply for jobs more consistent with my skill-set and experience. My wife is coordinating our kids’ virtual learning, so it’s very difficult for her to find work. I’m likely going to get a second job on nights or weekends, but we’re definitely at the point in which we might have to dip into our retirement savings. Otherwise, we won’t be able to make our mortgage payment. Are we crazy for doing that? I never thought we would be in a position like this, and I want to make sure I’m thinking clearly. Thanks for any guidance you might offer.

John; Alexandria, Va.

I’m so sorry you’re going through this, John. Sometimes when we see the reports of tens of millions of Americans who’ve lost jobs or part of their income we neglect to acknowledge that each of those people have deeply personal stories like yours. As your heroic actions have already proven, this truly is a time to fight for your financial survival, and you’re doing a great job so far.

Your financial life will undoubtedly be damaged during this period of time, no matter how long it lasts. Your goal should be to minimize the damage. Unfortunately, I’ve observed too many families in similar situations, try to operate “business as usual.” In other words, they haven’t been making cataclysmic changes, thus they’re speeding along the process of financial damage. When so many aspects of life are going wrong, it’s certainly understandable to seek normalcy within one’s lifestyle, but again, that will simply hasten the process of financial declination.

Ask Pete: Should you send your kid to grad school to defer student loans?

Ask Pete: If one of your kids is laid off and can’t pay bills, how should you handle it?

The action plan you’ve described so far will go a long way in making your recovery easier. Yes, I know you’re not in the recovery stage yet. You’re still in the heat of the fight. But making the right decisions now will make picking up the pieces easier.

I’m going to make the assumption you’ve already cut your discretionary spending as much as you can. And you’ve already done your best to maximize your household income by taking a job, continuing to look for a job which pays more consistent with your skillset, and by considering the utility of a second job. All of these efforts are clearly meant to lessen the damage which this period of time will inflict. Which now brings us to your mortgage payment and your retirement nest egg.

If you haven’t already, call your mortgage company and let them know what’s going on. If you happen to have an FHA mortgage, you can seek mortgage relief with a 180 day reprieve, and if for some reasons you’re not back on your feet at the end of that period, you can seek a second 180 day reprieve. This simply eliminates your obligation to make a mortgage payment for six months to a year. Even if you don’t have an FHA mortgage, your mortgage company may have a program in place to offer some level of assistance.

It’s vital you talk to your mortgage company before you take any action with your retirement funds. You wouldn’t want to compromise your long-term stability if you don’t have to. Now, I have some good news for you. The CARES Act allows you withdrawal up to $100,000 from retirement funds without penalty. If this provision didn’t exist, you’d owe a 10% penalty on whatever you choose to withdraw. You will still have to pay income tax on your withdrawal, but fortunately the CARES Act gives you three years to come up with that tax payment. If it’s possible, I recommend setting that tax money aside now, which can prevent several problems down the road. More specifically, set 20% of whatever you withdraw off to the side for federal income tax.

Do your best to create an expense plan for the next six months or so. I’m not necessarily suggesting it will take you that long to re-secure the type of employment you seek, but I’d rather you not have to constantly scramble to make your mortgage payment. Best case scenario, your household income rises sooner rather than later, and you can redeposit all the funds back into your retirement account within the next three years, and avoid the tax issue altogether.

Keep fighting. You’re doing a great job. 

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