When you’re short of cash, raiding your 401(k) plan may seem like a good idea. Here are two reasons why it isn’t.
Penalties and taxes
If you’re not at least 59½ years old, you’ll be hit with a 10% penalty for early withdrawals except in certain limited cases, and the money you withdraw will be taxed at your regular tax rate.
If your 401(k) earns an annual return of 5% over the next 30 years, an account with a balance of $50,000 could grow to over $215,000. A withdrawal taken and spent today will cost you that growth.
Bottom line: If possible, find other ways to pay your bills, even if that means contributing less to your 401(k) in the short term. While it’s wise to match funds your company provides, you might consider temporarily reducing contributions that exceed the matching amount.
What about loans? A 401(k) loan also has drawbacks. Again, money that’s not in your account won’t grow. In addition, if you lose your job, you’ll have to repay the outstanding loan balance or face tax penalties.
If you need assistance with financial issues, give us a call.
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