Don’t Borrow From Your 401K

As mortgage payments grow increasing unmanageable and credit card balances don’t seem to get any lower, Americans have been cutting budgets, making sacrifices, and developing creative solutions to their personal finance woes. But if you’ve considered borrowing against your 401K, you might want to rethink that decision.

The IRS views hardship withdrawals from a 401K account before the age of 59 1/2 as income, and the money is taxed as such. Furthermore, all funds are subject to a 10% penalty. These two factors combine to create several consequences. To begin, taking money out of your 401K will obviously reduce your retirement savings. Even though retirement may seem like a distant future event, you may be surprised at how difficult it is to refund your account while continuing to grow your savings. Beware that your emergency withdrawals don’t bump you into a higher tax bracket, as well — the taxes alone could cancel the benefit of your extra income.

Even if your withdrawal isn’t considered a hardship loan, experts say that taking money out of your 401K may run you the risk of not being able to support your lifestyle during retirement. In fact, experts say that based on current savings statistics, 43% of savers are in danger of living a simpler lifestyle when they reach retirement age. It’s a difficult task to pay back a loan while continuing to pay into your retirement savings.

Though budgets are tight and temptation is high, resist your urge to withdraw from your 401K account. Instead, consider alternatives like selling your car and buying used, eating at home more often, and turning your lights off when you leave a room. When age 65 rolls around, you’ll thank yourself.

photo credit: sxc.hu

Tags: 401k | Budgets & Money Management | Loans & Borrowing