Withdraw From Your 401k Only As Last Resort
In today’s challenging economy, it’s not unusual for consumers to face sudden financial emergencies. Job losses, injuries or reductions in annual salaries can send even the most responsible of individuals into financial crisis mode.
When homeowners face these emergencies, they often take a look at their 401(k) plans and see all those dollars just sitting there. It can be awfully tempting for them; they might consider withdrawing money from their 401(k) plans to help them pay off debt, make a late mortgage payment or, even, pay a large and unexpected tax bill.
The best advice that these individuals can hear? Don’t do it.
Withdrawing money from a 401(k) plan before they turn 59-and-a-half comes with two big, costly penalties. First, the federal government will levy a penalty on individuals equal to 10 percent of whatever they withdrew. Secondly, individuals will have to pay taxes on the money they removed from their 401(k) plans. This all adds up to some significant financial punishment.
That’s why it’s always best for individuals to seek out other options before withdrawing funds early from their 401(k). Homeowners with a significant amount of equity built up in their homes can take out low-interest home equity loans to pay down their debt, for instance. Others might be able to borrow money from family members. That’s never an easy thing to do, but it beats paying the painful penalties that come with withdrawing from a 401(k) plan.
Of course, even if individuals do find some way to allay their financial emergencies without tapping into their 401(k) plans, they still need to take a hard look at their financial health. After all, there’s always a reason why consumers get into serious debt. Sometimes it’s not the fault of consumers: They may have suddenly lost their job. They may have suffered a costly illness that kept them from working. They may have gone through a divorce that was costlier than expected.
Other times, though, consumers run up severe debt because of their own reckless spending. In such cases, it’s important for consumers to seek non-profit credit counseling. Credit counselors can help consumers uncover the reasons behind their massive spending habits. They can also help consumers craft budgets and curtail their spending.
Those consumers who don’t this important step might find themselves staring at a new financial emergency even after they solved an earlier one. And there are only so many times that individuals can tap into their 401(k) funds.