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Need money from your retirement fund? Vanguard advises taking loans instead of withdrawals.

Need some emergency money? With more than 36 million Americans unemployed in the wake of the pandemic, you are not alone.

Tim Buckley, CEO of Vanguard.
Tim Buckley, CEO of Vanguard.Read moreTyger Williams / File Photograph

Need to take emergency money out of your retirement fund?

With more than 36 million Americans unemployed in the wake of the pandemic, you are not alone. That’s the largest rise in claims since the U.S. Department of Labor started tracking the data in 1967.

As a result, the federal government changed the rules surrounding retirement accounts so we can take our money out more easily. The changes were part of the massive $2 trillion economic stimulus plan called the CARES Act.

However, Vanguard is advising investors that taking money out of our retirement accounts comes at a cost. Borrowing from your retirement plan may be a better strategy than withdrawing money. Here’s why, according to Vanguard: When you borrow from your 401(k) or other IRA or retirement plan, you generally begin to repay the loan with every paycheck.

“The automatic nature of repayment makes it more likely that the borrowed money will be returned to your long-term savings. Yes, you can repay a withdrawal from the plan for up to three years under the new law, but it can take more discipline and foresight to do so,” the mutual fund giant said in a note to clients.

The biggest risk of any retirement plan loan is that you won’t be able to pay the money back.

If that happens, your unpaid balance is considered taxable income. Typically, you would owe ordinary income taxes and, if you are under age 59½, there is a potential 10% early withdrawal penalty tax as well. The tax burden could be significant, and that could take a serious toll on your savings.

Under the CARES Act, rules are looser now for withdrawals from 401(k) plans and IRAs. Chiefly, the government legislation waived required minimum distributions in 2020.

Should you want to make a withdrawal and if you retirement plans permits it, you can take out up to $100,000 total from all retirement accounts, including IRAs — and that money won’t be subject to a 20% withholding for taxes.

If your plan usually charges a distribution fee for withdrawals, it will be waived if it is coronavirus-related. And if you’re younger than age 59½, the 10% federal penalty tax also is waived.

You would normally owe ordinary income taxes on the withdrawal, but you can pay those taxes over a three-year period, under the CARES Act. Or avoid taxes entirely if you can pay the money back into your account within three years.

Retirement plans that allow loans also doubled the amount that investors can borrow to $100,000 or 100% of the vested account balance, whichever is less. This is until Sept. 23.

If your plan usually charges a loan origination fee, it will be waived.

Loan payments can be suspended. If you already have loans outstanding against your retirement fund, and are affected by the coronavirus, you can suspend your loan payments for up to a year.

Following the suspension period, your retirement fund loan will be recalculated to include interest accrued, and the length of time you have to repay the loan may be extended.

Even if you haven’t been affected by the coronavirus, you can suspend payments on any plan loan until July 15.

Vanguard issued some tips on its website:

  1. Start small. While you can withdraw up to $100,000 (or 100% of your balance), you may not want to take out so much. Check your plan whether you can request additional withdrawals or loans.

  2. If you have a loan, suspend the payments. The legislation allows you to suspend loan payments for up to a year. Not only will you have up to an extra year to pay back your loan once payments resume, but you’ll have extra money in each paycheck over the next year to help with current financial obligations.

  3. Remember to plan for how you’ll repay yourself. The CARES Act allows you to tap into your retirement accounts without penalty taxes and repay the money over three years. Your ability to access money for the short-term needs of today but paying yourself back is important. It means you won’t owe taxes on the money and you also won’t wipe out your hard-earned, long-term retirement funding.