Money Matters
by Mike Rotondo, MBA, Curriculum Coordinator, Goodwin University Accounting Program

I was on YouTube the other day and came across a video of a financial planner advising people to “cash out” their 401 (k)s. His main concern was that tax rates are low now, and they are not likely to stay this low over the next 10 to 20 years. The Coronavirus Aid, Relief, and Economic Security (CARES ) Act, signed into law by President Trump on March 27, 2020, allows for the withdrawal of up to $100,000 from your 401(k) without penalty. You must still, however, pay taxes on the withdrawal or pay it back within three years (Investopedia.com).

If you are unemployed or in dire financial straits, this may be an option, but is it wise to “rob” yourself of your future retirement funds unless it is necessary? What the advisor in the video did not mention was that, even if your employer allowed you to “cash out” your 401(k), you would lose your employer’s match if one is provided. Even if your account is returning only two percent, you would still be giving up a 50 to 100% return from the funds your employer contributes.

When my father worked at the Travelers many years ago, as part of his employment package he was given a pension (defined benefit plan). Through the mid-1980s, it was quite common for employers to provide all the funding for these retirement plans. As costs began to rise, many employers switched to the 401(k) (defined contribution plan). This model allowed for a sharing of retirement costs between employer and employee. Most companies now offer the 401(k) exclusively. As part of the Revenue Act of 1978, Section 401(k) of the Internal Revenue Code came into existence. Its initial purpose was to allow high-salaried individuals to defer taxes on compensation. It has now become the primary retirement savings vehicle for the middle class. It is critical that everyone understands the investments in their 401(k) and when it is appropriate to take loans or withdrawals.

Having taught personal finance at Goodwin University for several years, it is important to me that young people, especially, understand retirement options. It can be difficult at times to drive this point home, as typical, traditional-age students often have little interest in the topic. Encouraging them to invest early and grow their retirement accounts for 40 or 50 years seems abstract to many of them.

UDL (Universal Design for Learning) brings new ways to engage students and to pique their interest in abstract topics. In a workshop for high school students, I provided them with a hypothetical “job” and a “salary.” They then were given the choice to invest in a 401(k) and IRA and received bills for rent, insurance, groceries, etc. Many were surprised how much of their “salary” was taken away in taxes and bills and really had to think about what they wanted to do with their disposable income. While we face economic challenges during this pandemic and have “talking heads” giving us all kinds of advice, it may be best to take a step back, make sure you understand all of the financial implications of your decisions, and think about what you are saving. There is an old expression in the financial world: “it’s not what you earn, it’s what you keep.”

Note: This blog is for informational and educational purposes only. It is not intended to be, nor can it in any way be construed to be, financial advice.