Borrowed money from your 401(k) during the pandemic? What to consider

Question: CB. from Boone County: I took money out of my 401(k) a few months ago to help pay some bills (my wife and I were both furloughed due to coronavirus). We’re both back to work now and I want to put that money back into my 401(k). Is there any particular way I need to go about doing this?

A: We’re glad to hear that you and your wife are back on your feet. And we’re also glad to hear that you’re determined to replace the money you withdrew – because that money, ultimately, should be used for retirement.

The CARES Act, passed back in March, made it easier for those financially impacted by the pandemic to take money from their 401(k). But the big question is whether you took a 401(k)withdrawal… or a 401(k)loan. If you took a withdrawal, you can recover any taxes you paid on it as long as you replace the money within three years. If you took out a loan, you won’t owe income tax if it’s paid off in five years. (In either case, double check with your plan provider about all the details – the new provisions in the CARES Act were optional for providers to adopt.)

As for how and when to put that money back into your 401(k), you have two options: Replace it all at one time in the form of a lump sum, or try a tactic called dollar-cost averaging. Which route you take depends on how much you took out to begin with and if you emotionally react to market movements. Ideally, you should try to replace the money as soon as possible. But that’s not always financially feasible, and some people can get nervous putting a chunk of money into the market in one fell swoop. That’s why dollar-cost averaging can be a good alternative if need be – in this case, you would contribute the same amount at regular intervals over an extended period of time. 

The Simply Money Point is that we recommend replenishing your 401(k) as soon as it’s realistically possible – so pick either strategy you think will work best for you and your wife’s current situation. Consulting with a credentialed financial advisor and/or a tax professional is also a good idea.