{"id":858,"date":"2010-09-27T10:52:16","date_gmt":"2010-09-27T15:52:16","guid":{"rendered":"http:\/\/www.billlosey.com\/?p=858"},"modified":"2010-09-27T10:52:16","modified_gmt":"2010-09-27T15:52:16","slug":"6-reasons-why-you-shouldnt-take-money-out-of-your-401k","status":"publish","type":"post","link":"https:\/\/billlosey.com\/knowledge-center\/6-reasons-why-you-shouldnt-take-money-out-of-your-401k\/","title":{"rendered":"6 Reasons Why You Shouldn&#8217;t Take Money Out Of Your 401(k)"},"content":{"rendered":"<p><strong>Recently, you may have heard about a spike in 401(k) withdrawals.<\/strong> The evidence is not merely anecdotal. Fidelity Investments recently issued its 2010 overview of the 401(k) accounts it administers and found that 22% of participants had outstanding loans from these retirement savings plans, with the average loan at $8,650. In 2Q 2010, a record 62,000 of Fidelity&#8217;s 401(k) participants had taken hardship withdrawals &#8211; a jump from 45,000 in the preceding quarter.<\/p>\n<p>If at all possible, you should avoid joining their ranks.<\/p>\n<p><strong>The persuasive argument against a 401(k) loan.<\/strong> If you borrow from your 401(k), you are opening the door to some big risks (perhaps not immediately evident to you) and you may pay some severe opportunity costs.<\/p>\n<ul>\n<li><strong>What if you lose your job?<\/strong> That&#8217;s an all-too-common occurrence right now. If you get laid off or leave your job and you have an outstanding 401(k) loan, guess what &#8211; you usually have just 60 days to pay it all back, 60 days without income from work. Well, what if you don&#8217;t pay it all back? The outstanding loan balance may be recharacterized as a 401(k) withdrawal. If you are younger than 59\u00bd, you may be assessed a 10% federal tax penalty on the &#8220;withdrawal amount&#8221;, which by the way would be taxed as ordinary income.<\/li>\n<p><\/p>\n<li><strong>What will you do with the money?<\/strong> Will it be invested in anything? If not, it won&#8217;t grow. When you take a 401(k) loan and use the money for an expense, you are forfeiting its potential for growth and compounding. (Think: how much could that lump sum grow over 20 or 30 years if your account returns 5% or 8% a year? Do the math, look at the potential.)<\/li>\n<p><\/p>\n<li><strong>The terms of a 401(k) loan are less than ideal.<\/strong> You can&#8217;t deduct interest on a 401(k) loan, and that interest is typically one or two points above the prime rate. Here&#8217;s another thing few people realize about 401(k) loans: when you pay the money back, you pay it back with after-tax dollars. Ultimately, those dollars will be taxed again when you take a 401(k) distribution someday.<\/li>\n<\/ul>\n<p><strong>The compelling case against hardship withdrawals.<\/strong> Sometimes these are made in worst-case scenarios &#8211; someone is being evicted or foreclosed on, or needs money to pay medical bills. Sometimes people think hardship withdrawals are &#8220;good debt&#8221; &#8211; they make these withdrawals in order to pay college costs or buy a house. Well, here are the reasons that you might want to look elsewhere for the money.<\/p>\n<ul>\n<li><strong>You may not be able to get a hardship withdrawal<\/strong>. Some 401(k) plans don&#8217;t allow them. Many do, but you will have to satisfy some IRS rules. Hardship withdrawals can only be made to pay medical expenses that are more than 7.5% of your adjusted gross income, to pay qualified tuition expenses, to pay funeral\/burial costs, to buy a home, to make home repairs, or to stop eviction or foreclosure on a primary residence. Beyond those IRS requirements, the company you work for might have its own stipulations. Some firms won&#8217;t give an employee a hardship withdrawal unless the employee can demonstrate that no other source can provide the needed funds.<\/li>\n<p><\/p>\n<li><strong>You may not be able to withdraw as much as you want<\/strong>. Okay, let&#8217;s say you are able to take a hardship withdrawal. The money is considered a retirement plan distribution. By law, your employer has to withhold 20% of it because you aren&#8217;t making a trustee-to-trustee transfer with the funds. Are you younger than 59\u00bd? If so, you may be hit with an additional 10% tax penalty for early withdrawal. Regardless of your age, the amount you withdraw will be taxed as ordinary income. So besides the potential subtractions above, you&#8217;ll lose even more of the lump sum you pull out to income taxes. Only in very rare cases can you get a hardship withdrawal without penalty (court order, total disability). Even in those circumstances, the money is still taxable.<\/li>\n<p><\/p>\n<li><strong>You can&#8217;t pay the money back.<\/strong> It would be nice if you could, but you can&#8217;t. To add insult to injury, after you reduce your retirement savings through the hardship withdrawal, you typically can&#8217;t contribute to your 401(k) for the next six months.<\/li>\n<\/ul>\n<p><strong>Knowing all this, would you still consider these moves?<\/strong> Is it worth it to possibly do harm to your retirement savings potential? There are alternatives. Talk to a financial services professional &#8211; you may be pleasantly surprised to learn what other options might be available.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Recently, you may have heard about a spike in 401(k) withdrawals. The evidence is not merely anecdotal. Fidelity Investments recently issued its 2010 overview of the 401(k) accounts it administers and found that 22% of participants had outstanding loans from [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[18],"tags":[],"class_list":["post-858","post","type-post","status-publish","format-standard","hentry","category-blog"],"_links":{"self":[{"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/posts\/858","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/comments?post=858"}],"version-history":[{"count":0,"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/posts\/858\/revisions"}],"wp:attachment":[{"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/media?parent=858"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/categories?post=858"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/billlosey.com\/knowledge-center\/wp-json\/wp\/v2\/tags?post=858"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}