I will try to keep my rant limited here, but this is seriously one of my biggest pet peeves when it comes to advice from so called 'financial experts'- early withdrawls, loans or cashing out your 401k or other retirement accounts. There are two things in this world that should never be used like ATM's. The first being your home. Just ask the millions of Americans who learned this lesson the hard way when they took out 2nd mortgages as a means of 'consolidating' debt. This ludicrous lie was sold as 'financially responsible' and 'a good way to reduce interest'. Of course all it did was move the debt and more importantly the risk to the largest asset many of us will ever own- your home. But this post isn't about past follies, it's about the second thing that should never be used as an ATM- your retirement funds. It's now becoming the thing to tap since the collapse of the credit market and home values. But I'm telling you don't fall for the gimmicks, because it could be one of the biggest financial mistakes of your life.
Have you ever heard the expression? Tell a lie often enough and long enough and it becomes accepted as truth. Just because something is accepted and legal doesn't make it right. Take for example smoking. It's both accepted and legal, but it will still kill you. As I said in my tip of the week using your retirement funds for anything other than retirement is straight up Stupid and here's why.
First- cashing out or partial withdrawl. This option might be very tempting for some of you if you have lost your job and don't really have more than a few thousand in your 401k. Because after all, it's not that much and you could really use the money now right? Don't do it!!! Not only will you lose the potential growth and compound interest on this money over the next 20-30 years but the IRS will take up to half of it. That's right the IRS will charge you a 10% penalty, plus the money is considered ordinary income and is subject to whatever income tax bracket you fall into. The money could actually bump you up into the next tax bracket making it even more costly. Even though this is your money it's like taking out a loan at 25-50% interest. That's crazy! There are some legal ways to get around the 10% penalty- if you are using the money to buy your first home or pay for excessive medical debt or for college. These are no good either. If you are saving for a house or college then that should not be done in retirement accounts. As far as medical debt, that is why you have an emergency fund and health insurance.
Second- loan. This option is billed as the 'better option' and has sadly become as common as 2nd mortgages in the housing boom days. But this has just as many risks and lost opportunity as a withdrawl. You may be thinking, but the money is going to pay down debt or some other worth-while financial endeavor. Mark my words. As soon as you take a loan out of your 401k, you will lose your job or have some other disaster come up and struggle to repay the loan. If you quit or lose your job then you are required by law to repay the loan in 90 days or pay the taxes and penalty. This is the last thing you need to worry about in such a condition...to be continued in my next post. (This is just getting too long for one post.)
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