shattered pieces of pink piggy bank (Photo: iStock)

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While divorce has often been a major historic factor in whetherpeople decide to make an early withdrawal from their retirement plan, there's a new factor in themix now: COVID-19.

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Nearly 30% of Americans reported that they have dipped intotheir retirement funds because of COVID-19, according to aMagnifyMoney survey of 1,239 people. Inaddition to raiding their retirement accounts early, 21% said theylowered the amount they're contributing, and 26% have stoppedmaking payments.

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Of those withdrawing funds, 52% said it's to cover basicexpenses.

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"The fact that the majority of respondents were withdrawingfunds to cover essential expenses highlights a dishearteningreality," according to the report. "Our survey revealed that 60% ofrespondents used their golden-year funds to pay for groceries, 42%spent it on household bills, 31% used it for rent or mortgagepayments and 27% used it for debt payments. Another 20% haven'tspent the funds yet."

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Divorce and job loss have historically been key factors inwhether people dipped into their nest eggs, according to a study by economists Frank Stafford of theUniversity of Michigan and Thomas Bridges of the University ofDelaware.

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Their study, though, did find a silver lining: "The researchersdid not find that homeowners were cashing in their retirements orreducing their contributions in order to remodel their homes ormake other large purchases. This suggests that families are lesswilling to use their pensions savings as a 'convenient ATM' fordiscretionary durable purchases," according to their report.

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With COVID-19 sacking the economy, though, Congresspassed the $2 trillion CARES Act in March that includesprovisions allowing employers to let people tap their 401(k) or IRAplans and avoid certain tax penalties.

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For those affected by COVID-19, the main changes allow forwithdrawals of up to $100,000 total between all retirement accountswithout paying a mandatory 20% withholding tax and 10% penalty forthose younger than 59.5 years old. The changes also double theamount that can be borrowed. That limit is now $100,000 or 100% ofthe vested account balance, whichever is less. If people alreadyhave a loan from their retirement account, they can also suspendthose payments for a year.

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Those changes came as unemployment skyrocketed. Nearly 40million people have filed for unemployment benefits sincemid-March, according to the U.S. Department of Labor.

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While the financial needs that warrant dipping into funds isreal, the risks are still there, especially for people who areheavily invested in stocks.

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"If you're predominantly a stock investor, the market value ofyour retirement fund has probably fallen starting with the swiftmarket decline of March," according to a Vanguard report. "So if you withdraw your moneynow, you may be selling funds and locking in those losses at a lowpoint. History tells us that when markets rebound after a downturn,it typically happens fast. Withdrawing your retirement funds nowmay prevent you from benefiting from any rebound."

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Dipping in early also means people may have to contribute morelater in their career to catch up, or work longer than theyplanned.

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Loans could be a better option for people in a financial pinch,but that still carries risks under the CARES Act.

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"The biggest risk of any retirement plan loan is that you won'tbe able to pay the money back," according to Vanguard. "If thathappens, the unpaid balance is considered taxable income. You wouldowe ordinary income taxes and, if you are under age 59½, there is apotential 10% early withdrawal penalty tax as well. The tax burdencould be significant, and that could take a serious toll on yoursavings."

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Nate Robson

Nate Robson is the U.S. Supreme Court and regulatory editor. Contact him at [email protected]. On Twitter: @Nate_Robson1.