« Mortgage Rates Rising | Home | Tax Time »
Raiding your 401(k)
By Daphne | March 10, 2008
You have some retirement money and due to no fault of your own you need to find a way to pay for your mortgage and other bills. Should you take money out of your 401(k) or should you try to get a loan from another source if possible?
There are major penalties for taking money out of your retirement account if you are younger than 59½. When you take the money out of your retirement account early, you will have to pay and penalty and tax on the money. The money that you receive from your account will be considered additional income which is added to your gross and you have to pay taxes on it. This may also mean that you will not be entitled to certain deductions if your income increases beyond a certain level.
Middle- and upper-income people who take money out of an individual retirement account, 401(k) or other tax-sheltered plan before age 59½ can easily lose half or more of it in federal and state taxes and penalties.
“It’s a bigger hit than you think,” says IRA expert Ed Slott.
But for some it is unavoidable. Some employers allow you to take a loan from your 401K. The loan, which needs to be repaid can be penalty free if you make payments on time. If not, then the IRS will consider the money a disbursement and you will have to pay an early withdrawal penalty as well as taxes.
Seek out the best option for yourself. Not everyone can take a loan from their employer or are old enough to start taking disbursements from their retirement accounts. If raiding your retirement account is the only way to go for you, try to take out as little as possible at the right time so you and your future self will not suffer for it.
If you have other investments that are non retirement related like savings accounts or mutual funds, use those first because the penalties will have less of a detrimental affect on you and your future.
A new way of borrowing against your 401(k) is to have an ATM card which allows you to use some of the money in your account in an easily accessible way. An ATM or debit card is too close to the problematic way many Americans have gotten into financial trouble in the first place. Adding an easy way to take money out of your 401K could be a disaster.
“It’s a horrible idea,”said Tracy Coenan, a forensic accountant who performs fraud examinations as president of her Milwaukee company, Sequence. “I’m not a big fan of loans from 401(k) plans anyway, but this makes it way too easy to pull money out of there without thinking it all the way through.”
Ms. Coenan said the plans are meant for retirement, and called the debit cards “a disaster waiting to happen” that can have implications on taxes if an employee can’t pay back the loan. As it stands, employees pay a setup fee to open the ReservePlus debit-card account and pay an interest rate 2.9% higher than the prime rate.
Just say no to debt if you can. The tax benefits of socking away money for a time when you have lower taxes only to pay higher penalties and fees is ludicrous.
Topics: March 2008 |
March 10th, 2008 at 12:44 pm
[...] Mortgage News Clips â?? Mortgage News Everyday wrote an interesting post today onHere’s a quick excerpt You have some retirement money and due to no fault of your own you need to find a way to pay for your mortgage and other bills. Should you take money out of your 401(k) or should you try to get a loan from another source if possible? There are major penalties for taking money out of your retirement account if you are younger than 59½. When you take the money out of your retirement account early, you will have to pay and penalty and tax on the money. The money that you receive from your acco [...]