Saving for retirement isn’t easy. It’s hard to forgo things now to plan for some distant day in the future. But whether you want to see the world or play golf in your backyard, if you want to be able to stop working at some point, saving up is usually necessary. Calculating how much you will need in retirement can be tricky, and it can be even harder to leave that money sitting there as things come up during the course of your life. As the funds add up, it can be tempting to use them before your working days are over.
If you already have a substantial value in your 401(k) and your employer allows it, you can use these funds to cover large purchases or bail you out if you wind up in serious debt. However, tapping retirement funds early can be dangerous, and it’s not a good idea to borrow anything from your future self that you cannot return relatively quickly.
Most financial advisers would suggest you avoid using retirement funds before you reach retirement age, and, in a perfect world, you wouldn’t need to. With the right planning, smart budgeting and an emergency fund, you should not need a quick fix to rescue your finances. You can lose the tax advantages of your retirement savings, incur penalty fees and be set back years in terms of saving.
A 401(k) loan allows you to borrow money from your own savings and pay it back with interest. A withdrawal from your 401(k) removes that money permanently. Whether you directly withdraw money or take out a loan against your savings, there are limited reasons that may warrant tapping your money pre-retirement. For example, since a home can be a valuable purchase and investment that can grow in value, you may decide it’s prudent to use funds from your 401(k) to pay for your first home. However, this may not be advisable in every situation.
You are also permitted to withdraw from retirement accounts to fund secondary or higher education for you, your spouse, child or grandchild. While this can make you or a loved one more valuable in the workplace, it’s important not to neglect your retirement needs.
If you have had a serious emergency that requires funding medical bills, you can find yourself facing a large debt. Instead of panicking, you can pay these bills, high insurance premiums or permanent disability with 401(k) withdrawals. Most employers do allow early 401(k) withdrawals but only when there is an immediate and heavy financial need. But again, be cautious, and seek the advice of a financial adviser.
Early 401(k) withdrawals or 401(k) loans are not for everyone. With a loan, you need to consider your ability to pay yourself back with monthly payments to get your fund back up to its previous amount and maintain growth. Also remember, that if you lose your job or retire, you will likely be required to pay back the loan immediately. But if you have significant cash flow and minimal savings outside retirement funds, this strategy can be a tool to finance your immediate financial needs. It’s important to fully understand the consequences of your choice and consider all the outcomes before you make such a large decision.
More Money-Saving Reads: