From this website , we can pull out $100,000 from our 401k without penalty.

Distributions taken from qualified retirement plans received during 2020 of up to $100,000 for COVID-19 related purposes are allowed without a 10% penalty, taxable evenly over 3 years beginning with year of distribution

What are the reasons not to cash out our 401k? In my opinion, my would greatly benefit to have this money in real estate or other investments. We have already saved up about a $150k for a house down payment, and having $100k more would allow us to buy a house in our area outright or with a very small mortgage. Alternatively, we could put it into the S&P500 or Tbills, etc.

Edit: By "other investments" I mean something like a Roth IRA, which can be invested in similar stuff but with better long term tax implications.

Also, please note that prices of many investments will drop; so selling when its low is acceptable, assuming it is reinvested in something else that can also be purchased for cheap.

  • 27
    1. Buying a house is not a COVID-19 related activity so why do you think you’d be able to claim this? 2. The disadvantage is that you have $100k less for your retirement.
    – Vicky
    Apr 8, 2020 at 16:18
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    @Vicky I don't plan to loose $100k of real estate, so the $100k won't disappear. Apr 8, 2020 at 19:18
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    "we would greatly benefit to have this money in real estate or other investments" – Isn't this money already in real estate or other investments? If the money in your 401(k) isn't invested in anything, that's very alarming. Why haven't you already invested it in whatever you want it invested in? Apr 8, 2020 at 22:34
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    I'm not sure why comments are word-smithing OP. He made it very clear his question is about removing from his 401K to do whatever else a financially savvy person would do with $100K. Apr 9, 2020 at 10:46
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    @user1717828 A financially savvy person would not pull 100k out of retirement. They might do so if there a) was a program that allowed them to avoid excise tax and re-contribute it later, AND b) didn't get shellacked in the market doing so. But neither of the things are true for OP. Apr 9, 2020 at 19:41

8 Answers 8


There are a couple reasons:

  1. You don't qualify. From your link:

    Distributions taken from qualified retirement plans received during 2020 of up to $100,000 for COVID-19 related purposes are allowed without a 10% penalty, taxable evenly over 3 years beginning with year of distribution, and may be recontributed within 3 years. Related purposes include a COVID-19 diagnosis for you, your spouse or dependent, and financial hardship as a result of business closures, reduced work hours, lay off, furlough, lack of child care or other factors as determined by the Treasury Secretary.

    If this doesn't apply to you, you can't do this anyway.

  2. Taxes. There is no penalty, but the withdrawal is still subject to taxes. You get to delay paying them, but they're at a higher rate than they would be if you withdrew at a slower rate and had no (or little) other income.

Additionally, you say

Alternatively, we could put it into the S&P 500 or Treasury bills, etc.

You could do this inside your 401(k) without having to pay income taxes (at least until you actually withdraw).

  • 11
    @axsvl77: Probably not the same. Example reason it could be lower: You spread the withdrawal over multiple years and aren't earning income at the same time, so your AGI puts you in a lower tax bracket. Example reason it could be higher: A number of politicians are campaigning on a platform of increasing income taxes.
    – Ben Voigt
    Apr 8, 2020 at 21:35
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    @axsvl77: A 401k plan comes in two flavors, traditional and Roth, just like an IRA does. Roth 401k has a few differences vs a Roth IRA, but also a lot of similarities.
    – Ben Voigt
    Apr 8, 2020 at 21:59
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    @axsvl77 Yes but with Roth you pay taxes up front. Apr 9, 2020 at 12:58
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    @axsvl77 Trad and Roth are exactly the same fiscally. However Roth is superior for a bunch of non-fiscal reasons. My parents last year pulled $300k out of a trad IRA to cover a medical emergency, and will pay taxes at an extremely high rate as a result. That's a non-fiscal example. Had that been a Roth it would have been a non-issue. Apr 9, 2020 at 17:29
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    @Harper-ReinstateMonica: How is "taxes due on surprise large expenditure" not a fiscal reason? But anyway, that means that traditional IRA/401(k) should be enough for ordinary predictable monthly expenses, and all the extra (from which you pay for emergencies) should be Roth.
    – Ben Voigt
    Apr 10, 2020 at 17:39

Getting money into qualified plans is difficult. Currently the tax law allows $19,500/year to be self contributed and in previous years it was less. It would take many years of maxing out contributions in order to catch up to withdrawing that amount.

You would be doing this at a time where your investments are significantly down. Will they rise again? History suggests so. Also you will owe tax on this money, so withdrawing 100K will likely yield around 70K or less depending upon your income. Spreading the tax over 3 years only lightly reduces the sting.

So unless you are in the very rare spot of having way over contributed to retirement savings there is no good reason to do this other than avoiding a bankruptcy or foreclosure.

So if you were able to save 100K in your 401K, what is preventing you from saving that amount outside your 401K and buying a home for cash?

  • 3
    Most of those reasons are good (and I agree it is a terrible idea), but the law does allow adding those funds back the account later as long as it is within 3 years.
    – JohnFx
    Apr 8, 2020 at 17:36
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    +1 I knew I was forgetting something in my answer. With the market down you are locking in any investment losses.
    – yoozer8
    Apr 8, 2020 at 19:24
  • @yoozer8 unless you move to investments that are equally depressed, and enjoy an equal rise later. Apr 10, 2020 at 16:13
  • @Harper-ReinstateMonica yes, but the question specifically mentions using it to buy a house, or to invest in real estate or other investments
    – yoozer8
    Apr 10, 2020 at 16:15
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    Pete, did you do any research into this scheme? It's specifically structured to allow you to "put the money back" via authorized excess contribs in 2021, 2022 and 2023. If you withdraw $90k, you can contrib $19,500+$30,000 in each of 2021, 2022, 2023 - just as the taxes for the withdrawal come due, canceling them out if you put it back. That makes your paragraphs 1 and 3 simply wrong; they should go byebye (unless you discuss why they do apply, since OP is not qualified for this program). Apr 10, 2020 at 18:47
  1. It's a retirement account. You're putting money into it for a reason.

  2. It's already invested. Paying the taxes now to convert it to a Roth IRA to invest the money seems backwards.

  3. Selling securities during a huge market downturn is extremely bad for the long-term prospects of investing.

  4. If your first thought at you can take money out of the retirement account without penalty is I should do that your retirement is not going to be enjoyable.

In summary I ask again: Why are you contributing money in the first place if you don't think the account is a good place for your money ?

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    The idea of investing for retirement is to maximize return, right? There are many avenues for doing this. Your answer presumes that 401k's are the absolute best way to maximize returns, and that may not be true. Apr 9, 2020 at 15:59
  • I can see many investments that are better than the markets/mutual funds. Maybe with less risk as well. This is one opportunity I have to change the amount of my portfolio that is in the markets. Apr 9, 2020 at 16:01
  • @axsvl77 My answer presumes that there's a reason you're putting money into your 401k. Why did that reason suddenly disappear ?
    – xyious
    Apr 9, 2020 at 16:01
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    One reason to put money into 401k is that it is matched by the employer. Now, this "matched money" is available for non-market investment.The money would still be for retirement, but could be outside of the market. Apr 9, 2020 at 16:03
  • @axsvl77 As an example, let us say your 401(k) is down in value by 20%. If you could instantly transfer some money from your 401(k) to another investment, you would ONLY want to invest in something that is also down by 20% or greater. Otherwise, you would be loosing value. Until you find a crystal ball that can tell you what future markets are guaranteed to be, you can only speculate and guess. It is doubtful that anyone at the beginning of this year would have predicted the market's current state -- and even less likely for the correct reason. Maybe we will see another new disaster tomorrow. Apr 9, 2020 at 20:14

A major reason to not withdraw is if doing so will cause your current investments in your 401k to be liquidated to whatever extent you withdraw. My understand is that this would normally be the case, even if you were to just borrow against your 401k. With current market conditions being what they are this may result in a substantial loss, possibly resulting in you "selling low". When the market comes back you will miss out on any gains in things that you are no longer invested in.

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    This is the first reason I thought of (presuming you qualify). You will be liquidating investments at a huge loss.
    – Arluin
    Apr 9, 2020 at 3:20
  • Who is to know what will dip harder, the stock market or the housing market? The assumption of the question is that the money would be re-invested in something else, which also can grow in value. Are you saying that only the stock market will drop, and that is the only thing that can grow? Apr 9, 2020 at 3:55
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    @axsvl77 Impossible to predict the future, of course, but in most of the US housing prices have not fallen much/at all yet--just people sitting on property waiting to see what happens. Whereas stock prices certainly have fallen recently. So for past data, the housing market is high compared to a low stock market... Generally we would like to sell high and buy low. Apr 9, 2020 at 14:04
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    @axsvl77 6 months is a long time, your question makes it sound like you are thinking about doing this today! Apr 9, 2020 at 14:32
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    @axsvl77 You could include a time frame in your question for when you plan to make the withdrawal, and you could change the language around the line "selling now when it's low is acceptable". That would make it clear that it's a long term plan. You might also look at other questions around general portfolio re-balancing, and look at this re-balancing considering all of your assets; I'm having a hard time imagining how a 401(k) is the best place to move money from, but maybe it is true for someone...only looking at all assets at once will tell you that. Apr 9, 2020 at 15:54

It's not allowed.

You cannot use this emergency rule to buy a house. It's not "a COVID-19 related purpose", as stated in your quote in your question.

The way tax regulation works is a) Congress passes laws, and b) IRS interprets the laws into regulations. Quick googling shows the law is passed but the regulations are not written yet. So you will be at the mercy of IRS's regulations, and that's no place to be.

Here's what one senator is saying. You have to have adverse financial consequences of some kind:

  • You, your spouse, or dependent has been diagnosed with the coronavirus (i.e., SARS-CoV-2 or COVID-19),
  • You have experienced adverse financial consequences because you have been quarantined, furloughed, laid off, or have had work hours reduced due to the coronavirus,
  • You are unable to work because of a lack of child care due to the coronavirus,
  • You own or operate a business and have had to close or reduce hours due to the coronavirus, or
  • You have experienced an adverse financial consequence due to other factors as provided in guidance issued by the Internal Revenue Service.

IRS regulations will certainly flow from that. So you will find in 2021 when filling out your taxes, that you cannot tick any of the boxes, and thus your $100k distribution is treated as a regular distribution with 10% penalty and full taxes due on April 15 2021, and cannot be restored back into the 401K.

Other than that, this is a very robust 401K quasi-loan

The biggest worry when withdrawing from a 401K in a crisis is the contribution can never be replaced; thus you'd damage your savings and impoverish yourself in retirement. However, they wisely addressed this issue. If you qualify for this emergency withdrawal, you are allowed to put the money back in in the next 3 years, i.e. make an excess make-up contribution.

They are waiving the 10% for qualified withdrawals, and the income tax from a Traditional distribution will be spread over the next 3 years. You do need to pay tax on the distribution, but you are also allowed -- encouraged -- to "put the money back" as an excess contribution (beyond your normal annual $19,500 allowance, say). When you put the money back, you get the normal tax deferral, which cancels out the taxes due.

Say you take out $90,000 out of a Traditional due to a genuine crisis. Hospital bills or you will lose your house due to unemployment. You then pay taxes on $30,000 of it in 2021, 2022 and 2023. However you "put the money back", contributing $30,000 (beyond your normal $19,500) into the traditional in each year. That $30,000 re-contrib is a legit 401K contrib, and as such, has its taxes deferred. That deferral cancels out the taxes coming due.

And neat as a button, you are back to status quo ante. You got to "borrow" the money for 1-3 years, you put it back in good order, your net taxes are zero, and the money in your retirement account is fully restored (as far as the IRS is concerned. The market may have other ideas.)

It's a really brilliant scheme, I can't believe they came up with it in 2 weeks.

Wait wait wait. You just want to change to Roth!??

One of your ideas was to invest in a Roth IRA. Good idea, wrong method!

You can already convert your 401K to a Roth 401K. You can just pick up the phone and do it. There are no contrib limits, the only thing that limits you is the tax bracket you're willing to throw yourself into by doing so (and no offense I have a feeling this is all news to you; educate yourself a lot before doing anything big).

Now if your company doesn't offer Roth 401K, get with HR and tell them to get on the ball. Most companies now allow this.

Withdrawing from a 401K using this program to contrib to a Roth, would be a huge mistake full of disadvantages and lacking any advantages. Right off the bat, your contrib would be limited to $6000/year. 401Ks are absolutely protected from attachments, lawsuits and bankruptcy. IRAs, that protection varies by state and is sometimes nonexistent.

  • "If they simply refuse to offer Roth 401K by the end of 2020, you can rollover any amount from a 401K to an IRA" I wish, but no, you can't roll out of a 401(k) on a whim, you need to reach 59 1/2 or lose your job.
    – Ben Voigt
    Apr 10, 2020 at 19:35
  • @BenVoigt Good catch... Apr 10, 2020 at 20:04
  • @BenVoigt lose or leave your job. There are even a few 401(k)s out there that allow in-service rollovers.
    – stannius
    Apr 14, 2020 at 18:13
  • @stannius: Losing it voluntarily is still losing it. Are you aware of any plans that allow in-service rollover prior to age 59 1/2 of the entire balance including employee deferrals?
    – Ben Voigt
    Apr 14, 2020 at 18:15

Here's a reason to leave it in 401k as long as possible: 401k is protected from bankruptcy and legal judgments


I can't even tell you good reason NOT to withdraw it, if you have it available. Unless I'm misreading things or misunderstanding what I've heard on tv, if you pay it back withing the 3 year period or roll it over to a similar account, there is no penalty to pay.

Honestly, this more than likely will be a time to be cash rich. I'm a Realtor and from speaking to a few lender partners, they've shared how tight the banks are becoming with their lending. Depending on how long this quarantine last, will most likely dictate how far things drop later. Having cash on hand will allow you to potentially pick up some cash flowing real estate for much less than you would have been able to this time last year. Maybe even multiple units! Buy low, Sell HIGH!

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    Except, this isn't mad money. You need to prove a COVID related hardship. Apr 9, 2020 at 19:43
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    I'm assuming the question was posed because the OP has the option to withdraw it and was looking for reason why they shouldn't. Apr 10, 2020 at 0:42

There is no definitive answer. In general, with or without the penalty, it is advisable to keep your 401k balance, because the eventuality of retirement and old age still remain, and you will still need that money as a living income. It should still be your last resort, given how difficult it is even in normal times to build your nest egg, against present day financial demands and impulses. At least if you need to tap into your 401k, it's preferable to borrow from it than to withdraw, since 401k plans seem to give a generous enough window to "repay yourself."

  • Keeping in mind that a legitimate borrower will have the opportunity to replace the 401K money taken in addition to the normal $19,500 contrib, because those are the rules of this program. If you explore 401K loans, you should also discuss what happens when you are laid off, a likelihood in this economy. Apr 10, 2020 at 19:25

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