Don’t Risk Your Retirement To Pay Your Current Bills

Don’t Risk Your Retirement To Pay Your Current Bills

 

That’s right – by taking money out of your retirement savings plan you are risking your retirement.  Many families are experiencing financial strain – the main reason people withdrew from their retirement funds was the threat of foreclosure.  What you have to remember is that taking money out means that you’ll miss out on any investment gains you could have earned by contributing during that period.  When you take a hardship withdrawal, you are prohibited from contributing to your 401K plan for six months. You’ll also lose the company match which is a guaranteed return on your investment.

The taxes and penalties you will have to pay are another reason to avoid taking money out of your 401K.  Depending on your tax bracket you could be required to pay a substantial amount to the IRS.  You will have to pay income taxes on the entire amount of your withdrawal, at your ordinary income rate.  If you are younger than 59 and a half, you’ll also have to pay a 10 percent early withdrawal penalty.

If you file for bankruptcy protection, creditors can go after your assets but federal law protects your 401k from creditors.  By taking that money out you are depleting an asset that is off limit to creditors.  A 401K loan may be a better option although there are downsides to that too.

The 401K loan has the potential to leave a permanent dent in your retirement plan.  You are missing out on any investment gains during the life of the loan.  If you are laid off or quit your job, the entire balance becomes due.  If you can’t repay the loan, you’ll have to pay taxes on the money plus a 10 percent penalty if you are younger than 59 and a half.

Your 401K is for your security in later life – not now!  People are not saving enough for a comfortable retirement as it is.  Please consider the lost growth and potential tax penalties before tapping into your 401K account.

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