4 steps to rebuilding your retirement plan savings

Shelly Gigante

By Shelly Gigante
Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites.
Posted on Nov 16, 2020

If you borrowed or withdrew funds from your retirement account this year, or halted new contributions to make ends meet, you are not alone; the coronavirus pandemic has created financial challenges for many.

A 2020 survey from Bankrate.com found that more than 27 percent of those working or recently unemployed had taken a withdrawal from their retirement savings accounts this year, including their 401(k) or IRA, or plan to use them as a source of income. The survey also revealed that nearly 1 in 5 Americans are contributing less to their retirement account now than before the COVID-19 crisis began.1

While financial professionals generally caution savers against raiding their retirement accounts, they also offer reassurance to those who had no choice. After all, every reasonable savings strategy factors in some bumps in the road.

The important thing, they say, is that you get your savings back on track as soon as your income allows.

“There needs to be a true plan in place,” said Emma McRoberts, a MassMutual financial professional in Indianapolis, Indiana, who noted that some of her clients during the pandemic put contributions on hold to build cash reserves in the event that they got laid off, while others took outright withdrawals to wipe out debt. “For example, think through how you can ‘double up’ on contributions in the future. If you stopped contributions, when is the deadline by which you want to begin again? How can we make sure that the money you were contributing is not being spent on unnecessary expenses, but being saved?”

To rebuild your retirement account, consider the following steps:

Here’s a closer look at each step.

Take advantage of relaxed repayment rules

New federal legislation in 2020 may make it easier for you to pay yourself back.

The CARES Act, which sought to assist families that were facing financial hardship as a result of the coronavirus outbreak, temporarily relaxed the rules for taking loans or withdrawals from qualified retirement plans in 2020, but it also permitted plan sponsors to provide borrowers up to an additional year (for a total of six years) to repay loans. (Learn more: What the stimulus package (CARES Act) means for you)

The relief legislation raised the limit for 2020 on retirement account loans from 401(k), 403(b), 401(a), and other qualified government plans to $100,000 from $50,000 or 100 percent of the vested account balance. Borrowers who took advantage must repay their retirement account loan on time or the unpaid balance will convert to an early distribution, which would be taxed as ordinary income.2

The CARES Act similarly offered leniency for retirement account withdrawals, allowing those age 59½ and younger who have been financially harmed by the coronavirus to take up to $100,000 from their retirement account in 2020 without incurring the standard 10 percent early distribution penalty. Key with this is that it must be a coronavirus related distribution.

“As financial professionals, we advise against taking money from your retirement account, but the CARES Act made the biggest downside, the penalty, irrelevant,” said McRoberts.

Retirement savers who took a COVID-19-related withdrawal would still owe ordinary income tax on the amount withdrawn. That tax, however, can be avoided if the withdrawn amount is replaced within three years after the date that the distribution was received. Unless you elect to include all the taxable income from the distribution in your 2020 income, it will be split evenly over your 2020, 2021, and 2022 tax years.

“As a general rule, if there are special provisions that would allow someone to avoid a tax liability and/or a penalty, I would suggest that this is a great objective,” said Brock Jolly, a financial professional with Veritas Financial in Tysons Corner, Virginia. “Even if they can’t pay it back in full, some is better than none!”

Put your payments on autopilot

To make yourself financially whole, you’ll need to make disciplined, consistent payments to your retirement account. You may also need to increase your future contributions to compensate for the months or years that the money you took out was not producing investment returns, said McRoberts.

Many 401(k) providers will take your loan payments directly out of your paycheck based on your repayment term, which is arguably the easiest way to repay what you owe. Pay it back before you can spend it. (Be aware that if you leave your employer for any reason, any unpaid balance on your 401(k) loan may become immediately due in full.)

Absent an automated payment plan, particularly for those who took a COVID-19 hardship withdrawal in 2020, you’ll need to calculate for yourself how much money you need to send to your retirement account monthly to pay your balance off in full by the repayment deadline.

Speed matters

The time value of money is a significant factor when it comes to paying back what you owe. Every day that your money remains outside your retirement savings account is another day that it is not producing potential investment returns.

For example, if you borrow $10,000 from your 401(k) that returns an average of 7 percent per year, and pay it back over five years, you would lose $2,795 if you repay the loan on time, according to a Bankrate 401(k) loan calculator. That assumes a 5 percent interest rate on loan payments and a time horizon of 30 years until you retire. If the loan is never repaid, you face additional taxes and a 10 percent penalty (unless you qualified for a COVID-19 distribution in 2020) and your loss climbs to roughly $103,000.

In the case of a 401(k) loan, it is true that the interest you pay on your loan balance goes back to you, but your loan payments are not tax deductible as they would be for a traditional contribution, said Jolly. (Learn more: The risks in borrowing from your retirement plan)

And, your employer may not allow you to make new contributions (or collect any employer match) until your loan is repaid in full.

By paying yourself back as quickly as possible, you minimize the opportunity cost of tapping into your retirement savings and position yourself to resume new contributions to potentially help you build wealth.

If you are 50 or older and contribute to a 401(k), 403(b), most 457 plans, or the federal government’s Thrift Savings Plan, you may be able to save an additional $6,500 in catch-up contributions in 2020, above and beyond the $19,500 limit in 2020 for all retirement savers.3

That said, don’t let an overzealous repayment plan derail you. If you commit too much of your monthly income toward rebuilding your retirement savings, or any financial goal, you might get discouraged and stop contributing altogether. Set yourself up to succeed by determining how much you can reasonably afford to save and stick with it.

“The key to any financial planning strategy is staying the course,” said Jolly. “If you’ve gotten off track, it’s a great time to get back on.”

Reduce expenses to free up savings

Scraping together extra cash for savings may be less difficult than it sounds if you look critically at your expenses. (Calculator: Setting your baseline financial goals)

A good rule of thumb is to keep your fixed expenses (mortgage, utilities, food, insurance, child care) to no more than 50 percent of your take-home pay. Another 30 percent should be earmarked for elective expenses, such as entertainment, travel, and gym memberships; and the remaining 20 percent should be allocated to paying down debt and building savings, including your retirement account.

If you find that your income does not go far enough, you may be spending beyond your means. To liberate room in your budget for savings, consider trading in your name brand car for a less flashy (and cheaper) model, shopping around for cheaper cell phone plans, spending less on dining out by hosting game nights (virtual, if need be) at your house, and traveling only to destinations to which you can drive. You might also consider allocating new bonuses and raises or even tax refunds toward your retirement account. (Related: Budget basics)

Jolly said that it is also important to explore the reasons you were forced to dip into your retirement fund to begin with. In some cases, it may be because you lack a sufficient safety net to sustain you in the event of an unexpected financial emergency — a painful lesson for many during the coronavirus crisis.

“A great lesson here is on the power and importance of having liquid savings that can be accessed in the event of an emergency,” said Jolly. “Frequently, we see people who have done a great job saving for retirement, but if an emergency occurs, they can’t last long.”

As you work to rebuild your retirement savings, he said, you should also start setting money aside for an emergency fund worth three to 12 months’ worth of living expenses, which gives you a “permission slip” to save and invest more aggressively in your retirement plan. A financial professional can help you determine how much savings you may need based on your own financial goals. (Related: Setting an emergency fund)

Supplement your income

Your savings strategy won’t sting at all, of course, if you can supplement your income.

Try flexing your entrepreneurial muscle by teaching lessons, tutoring students, or coaching a team. Put your favorite pastimes to work by becoming a ski instructor or fishing guide on the weekends. Host a professional bootcamp or launch a video course online. Take consulting gigs on the side.

You can also potentially make hundreds of dollars a month by renting out a spare basement or bedroom until you’re back on your feet, assuming that is permitted in your town. Or, if you live in a desirable locale, consider renting out your house for a week at a time using online vacation rental websites, while you take the opportunity to visit relatives (as social distancing measures permit) for free.

There are dozens of ways to augment your income if you get creative.


Pulling money from your retirement account need not undermine your financial future. By paying yourself back, continuing new contributions, and taking advantage of federal rules that permit penalty-free repayment, you can help ensure that a temporary bump in the road does not become a pothole on the road to a comfortable retirement.

Discover more from MassMutual…

Borrowing from your 401(k): The risks

7 steps to restoring financial wellness after the COVID-19 crisis

Need financial advice? Contact us



Bankrate, “Survey: More than 1 in 4 Americans to tap retirement accounts during coronavirus pandemic,” May 27, 2020.

Internal Revenue Service, “Coronavirus-related relief for retirement plans and IRAs questions and answers,” Sept. 19, 2020.

Internal Revenue Service, “401(k) contribution limit increases to $19,500 for 2020; catch-up limit rises to $6,500,” Nov. 6, 2019.

The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company.