May 2, 2008

Don’t Steal from Your Future

By Dana Joseph

On the surface, borrowing money from your 401(k) account when you face an emergency or a major unplanned expense may not seem like a bad idea. After all, it’s your money; why shouldn’t you use? And wouldn’t you rather owe yourself than a bank or credit card company?

Although these both seem like good reasons to borrow from your 401(k) account, it really isn’t the best solution. Because there are so many repercussions to taking funds out of your employer-sponsored retirement account, it should only be done as a last resort.

Taking money out of your 401(k) plan undercuts the strongest benefit of a retirement account: time. Even a retirement account with a small balance can grow surprisingly large if it’s left to grow for an extended amount of time. Take a minute to experiment with an investment calculator (found on websites like Bankrate.com) to see this growth in action.

Another drawback to taking money out of your employer-sponsored retirement plan is facing the additional risk of having to repay the loan with a relatively short notice. Imagine that you borrow $10,000 to purchase a car. Instead of paying a bank a monthly car payment, you simply repay the loan through a weekly payroll deduction. Sounds good, right?

Now consider what happens if your employer is forced to lay off some of their workforce. Through no fault of your own, you are laid off. Now you must either repay the loan immediately or face having the loan recorded as an early distribution from your retirement account. You will probably have to pay taxes on the money that is still owed and, depending upon your age, you may owe a penalty for the early distribution, as well. That loan doesn’t seem like such a good idea now, does it?

Finally teaching yourself to rob from your retirement fund whenever you face a financial hardship just isn’t psychologically a good thing to do. Although it might be hard to get through the hard time, you would be better served by finding your way through it. You’ll learn to plan for the future without jeopardizing the one you’re already working towards. If you just take money out of your retirement savings to solve your problem, you won’t experience the same hard time, but you won’t learn the valuable lesson that goes with it, either.

In general, it’s best to view your 401(k) account as what it really is: a retirement account. When you finally reach retirement age, you’ll be glad that you left your money where it was.

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Topics: 401K, Personal Finance |



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