Avoid Tapping Into Your Retirement

Contributed article in our financial series. Enjoy! – Kimberly

A hefty 401(k) is in an important part of building your retirement nest egg. The best way to keep it viable is to never dip into it for any reason. Of course, emergency situations may arise over the years. However, you really need to have another financial source available when and if that situation arises. Credit cards are the traditional go-to, but if unavailable due to bad credit the next option to consider is to apply for a bad credit installment loan online. Though debt is never ideal, it’s better than the alternative; remember, tapping into your 401(k) savings may be more costly than you know.

There are a number of reasons why you should never go into your 401(k). Here’s just a few:

  • Your 401(k) will immediately take a 10 percent hit: If you make any withdrawals before you reach the age of 59 1/2, you will be levied with a 10 percent tax penalty. The only way you can avoid this penalty is if you need to withdraw for a medical expense that exceeds your gross income by 7.5 percent. In some cases, there are allowable hardships. This can be to avoid eviction, making a primary home purchase, funeral expenses and education expense. Check with your employer to see if this is an option.

  • You will have to pay taxes on the withdrawal: In addition to the 10 percent tax, you will also face additional income taxes. So, at the end of the day, you will end up paying more taxes than you bargained for.

  • Your future wealth will be jeopardized: Using your 401(k) is not the best way to go if you need quick cash. This can definitely have an effect on your future money. Your 401(k) money compounds over time. If you continue to go into it, you will be impeding the growth of the money. So two or three times of dipping into the money could make a considerable difference in what you have once you retire.

Other things that should be considered before you take money from your 401(k) is that your take-home pay will shrink. This is because you will be required to start paying back your loan immediately. The payment isn’t tax-deferred either. This means there could be a rise in your taxes, which will shrink your take-home pay further. Also, what if you decide to quit, or god forbid, you lose your job? The loan would be due in 90 days. But, you’ve already spent the money. Now you will face even more tax trouble because it will be looked at as an unpaid balance to taxable income. The IRS is not in the business of forgiveness and lacks a sense of humor, so be warned.

So, the best thing to do extra income options available specifically for emergencies and such. You will be happy that you did. Always do what you can in protecting retirement savings. Dipping into your 401(k) can be very costly. If you get a loan, you will be able to pay for its intent, but what happens afterward. You could find yourself in an even deeper hole than you were previously.

If you need more information about the 401(k) program, along with rules and regulations, it’s a good idea to check with your employer or the program administrator.

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