Business
Email
Print
Don't Be A Retirement Saboteur
ADVERTISEMENT
Published: August 31, 2008
This economy has left people behind on credit card bills, short on mortgage payments and low on cash to cover basics such as gas and food. Those are gaps in the budget that have to be filled, and too often, people are raiding their 401(k) to come up with the extra money.
If you're one of those thinking about it, I want you to stop. Then keep reading.
When you pull money out of your 401(k) prematurely - in other words, before you reach age 59 1/2 - you're essentially robbing yourself. Not only do you have to pay taxes on the cash you pull out, but you'll also be hit with a penalty of 10 percent.
It is rarely, if ever, worth it.
Let's take a 30-year-old who expects to retire at age 65. They have $20,000 in their 401(k). If they cash out, they're only going to take $12,000 of that money home because of taxes and penalties. That's $8,000 of your money, gone. But that's not even half the story. By pulling out, you're also passing up an opportunity for your money to grow. If left invested, that $20,000 could easily turn into upwards of $100,000 by the time you reach retirement age.
The good news is that there are ways to come up with the money you need without sabotaging your future.
Balance your budget. I know, you've been over it with a fine-toothed comb and you simply can't find a place to cut back. But have you gone through the exercise of tracking your spending for a week or two? Cash often flies out of our pockets and we have no idea where it went. You go to the ATM, take out $20, and by the end of the day it's gone. This is where writing everything down helps, because you can look back and see that $3 went to that coffee you could have made at home.
If tracking doesn't highlight any such discretionary spending, then you might need to consider taking on a part-time job for a while, or asking for a few overtime hours at work. I know it doesn't sound fun, but remember that it's a temporary - and often unavoidable - solution.
Scale back your contributions. I know the general advice is to contribute, contribute, contribute, but if you're feeling the squeeze and your credit is likely to be affected by late or missed payments, you need to take action. I'm giving you permission to slow your contributions to your 401(k) for a bit and redirect money to your bills and other fixed expenses. The key words are: "for a bit."
Take out a loan. This is your last resort. One option is a home equity loan, if you have good credit and enough equity in your home. "A home equity loan is one of the lowest cost loans you can get, and you can still deduct the interest from your taxes in most situations," says Sri Reddy, head of retirement income strategies at ING. Another option is to take a 401(k) loan instead of withdrawing the cash for good. A loan allows you to pull out a portion of your money when you need it and slowly pay it back to yourself, with interest. The downside? You're paying it back with after-tax dollars, which will then be taxed again when you start pulling the money out for retirement. If you leave your company, you'll likely be asked to pay it back in full inside of 60 days. And while your money is out of the market, you'll be missing out on any growth it would have experienced.
Lastly, if you leave your job, you can leave the money in your former employer's plan, have the company cut you a check for the account balance, or you can roll the money over into an IRA. If you take the check, you're going to face the taxes and penalties.
Leaving your money with your former employer is not a bad option. But the rollover is quick and easy, and puts you in the driver's seat as far as investing that money for the future.
With reporting by Arielle McGowen. Jean Chatzky is an editor-at-large at Money Magazine and serves as AOL's official Money Coach. She is the personal finance editor for NBC's "Today Show."
Email
Print
TBO.com - Tampa Bay Online Member Agreement | Privacy Statement | Work With Us
