Tapping into 401(k) a last resort
Using funds from a 401(k) may seem like a solution to money woes — but it’ll cost you in more ways than one, says investment advisor Michael J. Francis.
“Your retirement account should serve as the last line of defense when working through financial difficulties,” writes Francis, president of Francis Investment Counsel LLC, in the Milwaukee Journal Sentinel.
Taking a distribution can absorb as much as 40 percent of a 401(k) account because the money is taxed as regular income, and those under age 59 1/2 will be hit with an additional 10 percent premature withdrawal tax.
One option, for those who are still employed, is to request a hardship withdrawal. The IRS allows such withdrawals from 401(k) plans to cover certain circumstances, such as medical expenses, college costs, funeral expenses, casualty losses, and to prevent eviction from or foreclosure on one’s home, Francis explains.
A second option may be to take a loan from one’s 401(k), if it is allowed by the employer. Borrowers aren’t hit with taxes or penalties, but there are restrictions. Generally the maximum loan amount is 50 percent of the 401(k) balance or $50,000. Loan terms are usually five years. But this idea, too, has pitfalls: double taxation, penalties if employment is terminated, and ultimately, less money for retirement.
And with more Wisconsin companies cutting back on their 401(k) matches — as Milwaukee Public Radio recently reported – that’s a hit few can afford.
Read the Milwaukee Journal Sentinel article.
For more information
Bankrate.com: Need Cash Fast? There’s Always Your 401(k) …
SmartMoney.com: Should You Borrow from Your 401(k) or 403(b)?
TheDollarStretcher.com: Borrow Your Own Money? 401(k) Loans
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