OPINION: Congress doubled the amount you can borrow from your 401(k) right as that became more dangerous.
Congress has just passed the CARES Act, allowing people to borrow more from their retirement portfolio if they’ve been hit economically by the crisis.
There are plenty of wrinkles. You have to apply during the next six months, Neis says. And only certain people can benefit from the new rules. “They are not available to everybody,” he says. “You have to be effected [financially] by COVID-19.” That includes being laid off, furloughed, or working reduced hours for reduced pay, he says. It also includes those who can’t work because they can’t get child care for their children.
On the other hand, in normal times there may be a good reason to borrow from your 401: Namely, if you really, really need the cash flow up front for a serious purpose, and you’d have to borrow it from somewhere anyway. Personal bankruptcies skyrocketed after the 2008-9 financial crisis, even though Congress had just drastically tightened up the laws. In 2007, there were fewer than 500,000 chapter 7 personal liquidation bankruptcies.The surge in personal bankruptcies came after the economy started improving. Too many people just couldn’t get out from under all the debts they’d accumulated in previous years. Personal bankruptcies didn’t get back down to around precrisis levels until 2015.
The exceptions, he adds, are rare: For example, an IRA inherited from a relative may be subject to creditors’ claims. This isn’t gaming the system, he adds. This is deliberate public policy, and is respected as such by the courts.
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