Tapping Your 401(k) Early: Experts Say Leave It
If you’re considering raiding your 401(k) retirement account to take a vacation or pay off your credit cards, experts advise you to think long and hard about it – and then don’t do it.
The recent economic downturn has more military members and their families thinking about making early withdrawals from retirement accounts. However, aside from rare instances, doing so can ultimately be more trouble than it’s worth. All 401(k) holders are allowed to make withdrawals for certain “qualified hardships.” These usually include the following:
- money for sudden disability
- the purchase of a first home
- repair of damages to your home
- payment of higher education expenses
- prevention of eviction or foreclosure
- certain medical expenses that aren’t covered by health insurance.
But even if you’re making a hardship withdrawal, you will likely still face a 10% early withdrawal penalty if you are younger than 59.5 years old and owe regular income taxes. To find out more about possible penalties, check your 401(k) plan prospectus, which spells out what qualifies as a hardship.
Most 401(k) plans also offer loan provisions that allow you to borrow against the account and repay yourself with interest. Restrictions vary, but usually a 401(k) holder can withdraw no more than 50% of the vested account value as a loan. That money can be used for anything; no hardship has to be proven. The advantage is that you’re borrowing your own money and paying it
back with interest. However, experts don’t recommend using your retirement savings for a loan. Although the money will be repaid, you will lose the compounded interest you would’ve earned had you not borrowed the money. Additionally, you may be restricted from contributing to your 401(k) while you’re paying back a loan.
Rather than turning to your 401(k) to solve temporary cash-flow problems, military members and their families should turn to other financial outlets, such as military lenders, like Just Military Loans, that can provide short-term loans, even to those with bad credit.
What’s your plan of attack for dealing with financial hardship? Have you ever borrowed from your retirement savings to pay for unexpected bills? Tell us about your strategies and experiences!