Should I Borrow from My 401(k)?
One of the things I love about a retirement account is that small contributions can add up to a nice amount over time. As a matter of fact, it doesn’t take long for that amount to grow larger than an emergency or other savings account. With that growth, comes the temptation to use that money for other costs. Today we’d like to take a minute or two to provide a couple points for you to consider before you withdraw or borrow money from your retirement account.
What Are You Taking Away From?
First of all, when you take money from your retirement, you are taking away from your future, so it should be a last resort. What do you plan to use the money for? College tuition? There may be lower cost schooling options or other loans available, but you may not be able to borrow money when you’re in retirement. Are you looking to pay off debt? Please, talk to a licensed credit counselor first to see what other debt repayment options are available. Before you resort to your retirement account, look at other alternatives such as a personal loan, a home equity loan, or even tapping your emergency account.
What Type of Withdrawal Are You Thinking About Making?
Secondly, know the difference between an early withdrawal and a loan from your retirement account. An early withdrawal will not need to be repaid and may require proof of hardship. This can be quite costly though. Not only will you have to pay taxes on this money, but you will also have to pay a penalty of about 10%. When you couple that with the fact that you are taking away from your financial stability in the future, cashing out your 401(k) account turns out to be a pretty expensive and risky option.
Another option is to take out a loan from your retirement account. With this option, you are BORROWING from your account, so you will have to make payments, often with each paycheck until the loan is paid in full. I like this option a little better because you are repaying yourself and aren’t risking your future quite as much. However, you still need to be careful. Ask yourself if you can afford the payments and take the time to write up a household spending plan or a budget to make sure the money is really there each month.
Be Honest About Your Current Income Stability
Also, do an honest assessment of the stability of your job. Many people don’t realize that if they lose their job, or even leave on their own, the ENTIRE loan balance will be due in sixty days. At that point the IRS may also consider that money an early withdrawal and you’ll have to pay income taxes on it along with the ten percent penalty. Again, this makes it an expensive and potentially dangerous option.
Listen, we all know that life can hand us some unexpected situations. Some of them can be overwhelming and expensive. So we’re not here to tell you that NOBODY should EVER take money from their retirement account, we simply ask that you carefully weigh your options and make an informed decision. If you ever need help, please contact one of our certified credit counselors at 1-800-994-3328 or contact us here. We are here to help.