Saving for retirement, through a 401k or IRA, is one of the best ways to set yourself up for a better future. You can take pride knowing that money is being set aside for your future. That money is yours, so if you need it, it’s important to keep in mind things to consider when taking money from your 401k. Before I get into that, I want to make sure you understand the importance of saving for retirement.
The earlier you start putting money away for retirement, the more you will have come that time. To make sure you are making the most of your retirement savings, I strongly urge you to review your investment options. Check out the video below to learn more about the importance of saving for retirement early:
Since you will be saving for retirement for years and years, there may come a time when you need that money for something. It’s never a good idea to take money from your retirement plan, but it is there in case of a true emergency. I’m sharing 5 things to consider when taking money from your 401k to cover unexpected or large expenses. Remember, your retirement money should be a last resort. If you do need it, make sure you know what you’re getting into!
#1 You can take money through a hardship withdrawal or loan
This may not apply to all 401k plans, but most of them offer the ability to take money out two ways: through a hardship withdrawal or a loan. If you take money out through a hardship withdrawal, you do not have to pay it back. There are stricter rules around taking money out through a hardship withdrawal. For example, you will have to provide detailed documentation around your hardship.
If you go the route of taking money out via a loan, most plans offer two different types: 1) a loan for a home purchase or renovation or 2) a general-purpose loan. Both loan options require that you pay the money back. Re-payments for the loan are typically taken out through your paycheck for a set amount of time. You do have the option to pay it off in full as well.
#2 You are taxed on money take out, unless it’s a loan and then you pay interest
Now that you know the different ways you can take money from your 401k, you need to know what those ways will cost you. If you take money out through a hardship withdrawal, you will be required to pay taxes on it. You would have been taxed at retirement, so you will be taxed now. You will also be subject to an early-withdrawal penalty if you are under 55 years of age.
If you take money out through a loan, you will be required to pay interest on that loan. The interest rate will be determined by your plan provider but will typically range anywhere between 4-7%. The good thing is that you are paying interest to yourself.
#3 Any money taken out is a missed opportunity for growth
Taking money out via a loan means that you will pay that money back, with interest, but what if your plan investments grow by 10% during the time you are paying back the loan? All that means is that you are missing out on that incredible growth.
It’s important to remember that any money taken out of your 401k plan is not able to grow like the money left in there. On the other hand, it’s also not subject to losses. However, do you really want to take that risk? Think about how much you are taking out and what it could really cost you. Missed growth may be harder to come by in the future.
#4 If you lose your job with an outstanding 401k loan, you only have 2 options
Whether you are laid off or quit your job, if you have an outstanding loan against your 401k in either situation, you only have two options. Your plan provider will ask that you pay the loan back in full within 90 days (or whatever they deem applicable), or you will be forced to take that loan out as a withdrawal and will be required to pay the early-withdrawal penalty (if you are under age 55), as well as any taxes on that money. If you plan on leaving your job or think there is a chance you will be laid off, save yourself some money and headache by avoiding a 401k loan.
#5 You are borrowing against your future
Make sure that you are making the right decision when you decide to take money out of your retirement plan, because the reality is that you are borrowing against your future. You may pay it back, if you take out a loan, but what if you don’t? Whatever you need the money for now, will you need it more in your future?
It really depends on where you are in your life. If you are in your 20s, you have more time to pay it back. However, if you are in your 40s, you may do more harm than good by taking money out. Take the time to think about how this could impact your future. Trust me, you would not want to be in a position where you can’t retire because you took money out when you shouldn’t have.
Related: 8 Things to Know About Your 401k Plan
I understand that we all get in financial pickles. If taking money out of your 401k plan is your only option, then be happy that it’s there and move forward with it. However, if you have the ability to figure it out another way, it may be better for your future to do so.
Have you ever taken money against your retirement plan? What was your experience with it? Share by leaving a reply in the comment section below.
2 thoughts on “5 Things to Consider When Taking Money from Your 401k”
Hi. Just a question. What happens to your existing 401k loan if the borrower suddenly dies?
Hi Weng! If there is a beneficiary assigned, then the funds will go to that person. If not, the 401k monies will be included in the deceased’s estate.