A recent survey from Bank of America found that 18% of respondents admitted to withdrawing money from their retirement accounts early to help pay for credit card debt, mortgage payments, and job losses. It’s a difficult time for everyone but cashing out your 401(k) should be seen as a last resort because it is so very expensive. When you withdraw money from a 401(k), you not only pay income tax on the money but you also pay a 10% penalty on top of that. If you’re in the 25% tax bracket, you’d pay 35% on the money you withdraw… that can hurt a lot.
However, sometimes you have no choice. Sometimes you are forced to look for options and the last one left is your retirement. If you have to change your retirement plans, try to do it in this order:
- Cut expenses elsewhere: Cut all the non-essentials, which means anything that you don’t need to survive. That means cut the cell phone, end Netflix, shut off cable, everything. You need to get down to as lean as possible, then start searching for funds. If you need some ideas, here are a 100 money saving tips you might be able to take advantage of.
- Contribute less: If you don’t contribute it in the first place, you avoid the 10% penalty for withdrawing it early. You may be surrendering an employer match but you can’t afford to take it out on the backend, the 10% eats away any match you’d be getting.
- Withdraw from a Roth IRA: You can withdraw your principal from your Roth IRA without penalty, so that should be the first place you go to if you must raid an account. Check out the exact rules involved because sometimes there are penalties if you aren’t careful.
- Withdraw from a Traditional IRA or 401(k): If you’re down to this last option, you’re down to it and there’s not much that can be done.
Good luck, it’s a difficult economic time and the last thing you want to do is make it worse by jeopardizing your retirement.