Tips to Avoid Tapping Into Your 401k


Millions of Americans prepare for retirement with 401k plans. With these plans, employees contribute money through payroll deductions. In many cases, employers match. That money is invested and it continues to grow overtime. When used correctly, the individual is able to retire comfortably with the money invested, made, and saved. The keyword is saved. Those in financial distress often turn to their 401k plans and opt for an early withdrawal. It is a good idea? No.

When withdrawing money from a 401k plan, you are charged a penalty. This is 10% of the amount withdrawn. Although 10% is a relatively low figure, it is still money you lose and for no good reason. Moreover, you pullout from your investments. Overtime, they likely would have grown.

Since there are financial consequences to tapping into your 401k early, what are your alternatives?

Plan wisely. A 401k is a retirement savings plan. As you near retirement, you should aggressively put money in your account. Still, it is important to save money the traditional way. If you do not already have a savings account, get one. You have a set amount you contribute to your 401k plan each paycheck. Set the same plan for your savings account. In fact, most companies with direct deposit allow you to scatter your funds. Deposit some in your checking and some in your savings account.

Save money. Many individuals only believe those in debt need to save money. This is not true. Saving money benefits everyone. There are many ways to save money. Reduce your phone, internet, or telephone packages. Look for sales and use coupons at the grocery store. Another effective, yet simple approach is to save your change in a jar. Take all of the money you saved by creating a budget or limiting your expenses. Deposit into your savings account. This money can come in handy during an emergency. If you never use it, it is still there when you retire.

Opt for bank loans. For those with poor credit, this may not be an option. If you have good credit, apply for a loan. Personal loans are harder to get, as they are unsecured. With that said, financial lenders give them to those who need help paying medical bills, paying for costly car repairs and so forth. As for buying a new home, going to college, or buying a new car, there are specific loans for these. They are mortgages, student loans, and automobile loans. Apply.

If you are denied a bank loan, your next instinct is to move on to the next option. We will get to that in a minute. For now, why were you denied? It likely had to do with your credit. If you are indebt, work to repair this as soon as possible. Take a percentage of the money saved and apply towards overdue bills. You should never enter retirement indebt. Even if you are not planning to retire for 10 years, work on improving your credit now.

If you cannot get a bank loan and do not have a savings account with emergency cash on hand, you may consider tapping into your 401k. Before doing so, speak to your employer. Many allow their employees to take 401k loans. This is different from an early withdrawal. You are borrowing the money. As opposed to a 10% early withdrawal fee, you may only be charged a small $50 administrative fee. If you opt for a 401k loan, you must repay. It may sound nice to just take your money and run, but consider the consequences. You lose money. Aside from the 10% withdrawal fee, the money does not continue to grow with your investments.

Finally, be sure to speak with friends and family. If you only need a small amount of cash, such as one or two thousand dollars, someone you know may be able to help. Often times, you are able to payback these loans without interest. They are “off-the-record,” loans. Just know that you are not the only person facing financial difficulties in this struggling economy. Family members and friends you thought were once wealthy, may have tightened their budget too. Do not be offended if your request to borrow money is turned down.