Should you lower your contribution rate?
Cutting retirement contributions isn't a decision to take lightly. Every dollar you invest can earn compound interest, and when you reduce investments, you lose out on potential future interest and earnings.
If COVID-19 has been more of an inconvenience than a threat to your financial well-being, you're best off staying your course. But if you or your spouse has lost a job or been furloughed, you might want to rethink how much you're saving for retirement right now.
For example, it's okay to halt or limit workplace plan contributions if you've tapped your emergency fund or don't have enough emergency savings. It's also better to stop investing temporarily than to rack up credit card debt or take out a loan.
Should you take money from your account?
It's never a great idea to pull funding from your future, but some situations—like economic uncertainty—may warrant it. Any money you withdraw could be subject to income tax, plus a 10% penalty if you're under age 59½.
Alternatively, you might want to borrow from your account if your plan allows it. You'll owe interest on your loan, but your payments will go back into your account. Still, this strategy comes with risks, especially if your job isn't secure: For one, you pay yourself back with after-tax dollars—which could be taxed again when you withdraw money in retirement. Worse, if you leave your employer before you repay the loan, you'll either have to pay the full balance or owe income tax on it (plus a 10% penalty if you're younger than 59½).
However, the March 2020 CARES Act included benefits for investors looking to tap their retirement accounts: Opens in new window You can withdraw up to $100,000 without penalty (you'll still owe income tax, but have up to three years to pay it). You can also borrow up to $100,000 and take up to six years to repay (with interest).
Should you consider a Roth?
If your employer offers it, you can choose between a traditional and Roth account. The difference is taxes: You fund a traditonal account with pretax dollars, then owe income tax on withdrawals (usually in retirement). With a Roth, you contribute after-tax dollars, but withdrawals are federal tax free as long as you meet certain criteria.
A financial professional can help you decide which is best for you. But in general, if you think your tax bracket will be lower when you withdraw than when you contribute, a traditional account makes more sense. If you think your bracket will be higher (and you want tax-free withdrawals in retirement), go with the Roth. If you're not sure, you can "hedge" your tax risk by investing in both.
How to adjust your investment strategy
When it comes to investing, you essentially have two decisions to make: 1) how to allocate, or divide, new contributions among different types of assets, like stocks and bonds; and 2) how to ensure the money already in your account matches your investment strategy.