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Don’t let a short-term setback ruin your financial future
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For more information contact:
Tanisha Warner (713) 394-3202 |
Release Date: May 10, 2006 |
When faced with a financial crisis, it is tempting to look to long-term savings to ease the immediate burden. However, the solution might be worse than the problem. Tapping retirement money early could tarnish your “golden years.” In addition to causing stress, cashing in on retirement plans early is costly.
Money withdrawn from a 401(k) plan will likely face a tax, plus a 10 percent penalty on the amount withdrawn. This tax bill will probably total about 37 percent of the money withdrawn. As an example, if you withdraw $10,000, you will probably see only $6,300 of that.
Borrowing money from a 401(k) account can also be a risky move. Long-term plan loans usually charge the prime interest rate plus one or two percentage points. In fact, it could cost more than the stated rate. If you borrow from your plan at 7 percent but the cash pulled out has been earning 9 percent in the stock market, you are losing out on the additional earnings and future compounding interest. Another potential problem is that if you quit or lose your job, your loan may be due immediately, at a time when you may be least able to pay it back.
Before you put your financial future at risk, the experts at Money Management International offer the following alternatives to tapping your 401(k):
-Borrow from yourself. While cashing in on your retirement account is not desirable, you might be able to take a short-term loan with no penalties. The only requirement is that you pay back the entire amount borrowed within 60 days.
-Take a good look around you. Most likely, there are many things in and around your home that you could sell for cash. Also, take a good look at your spending habits. In all likelihood, there is plenty of ‘fat’ to be trimmed from your budget.
-Seek employment. Secure a temporary job to help you through this setback, even if it is not in your field of expertise.
-Use all available resources. Research all sources of cash. For example, you may have a life insurance policy with a cash value. Collect on money lent to family and friends.
“If you must access your retirement funds, consult with an accountant or your benefits provider about your rights and responsibilities,” said Cate Williams, vice president of financial literacy for Money Management International. “The IRS does recognize some legitimate reasons for hardship withdrawals. The person applying for a hardship withdrawal must show a true ‘immediate and heavy financial need’ and have no other source of cash available to avoid tax penalties.“
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Money Management International, is a non-profit community service organization that provides confidential financial guidance, counseling and debt management assistance to consumers. MMI helps consumers trim their expenses, develop a workable budget, lower their debt payments and repay debts. Services are available by phone. To visit with an MMI counselor, call toll-free 1-800-762-2271- 24 hours a day, 7 days a week. Spanish speaking counselors are available. Consumers can also learn more by visiting the MMI home page at www.moneymanagement.org.
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