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Advantages and Disadvantages of Withdrawing Money from a 401(K)

BALTIMORE – Inflation is making it harder to manage household budgets, as everything seems to be going up except people’s bank accounts.

Families who need more money to make ends meet could turn to their savings for extra money to pay their bills.

Some people might consider withdrawing money from their 401(K) plan. The conventional wisdom is not to touch your savings, but there are some situations when it might be beneficial to do so.

Gas, food and energy prices are soaring. Interest rates on mortgages and credit cards are rising. With so much uncertainty about the economy, financial advisers say it’s time to prepare for the worst.

CEO of financial advisory firm Brokers International, Mark Williams, said: ‘If you were to lose a job today, and the national average is around 5-6 months to find a new job, then if you are presented in this situation, having a safety net of four, or five or six months of income can really be beneficial for most people.

Williams has three basic tips for dealing with times of economic uncertainty:

reduce your debt, lower your expenses and increase your savings.

Without an additional source of income, achieving these goals could cause some to dip into their 401(K) plans.

“I’m going to ask for this to be your last option because it’s your retirement. I hate that people participate in their retirement, but it’s an option and it could be a really good option in a lot of situations,” Williams said. .

This might be useful for those with high credit card debt.

“This high debt could be crippling for a lot of people, so if you have funds in your 401(K), yes, you can use that as an example,” Williams said.

Anyone considering this route should be sure to check their plan rules first.

“Find out if, first, your plan allows you to take out a loan. Along with the takedowns they usually do, there’s also something called the hardship takedown, so if you’re in a really bad spot, there’s less penalty and it’s a bit easier to take a hardship takedown said Williams.

Early withdrawals that do not meet the hardship criteria, and made before retirement age, come with steep penalties and higher taxes that reduce the share of your own money that ends up in your pocket.

“Taking money out of your 401(K) because the government gave us this tax deferral often comes with a penalty. And, you reduce your 401(K) amount. So taking out a loan is often more advantageous, but you also have to be careful. You have to pay it back within five years and of course you have to have the means to pay it back,” Williams said.

Some might think they have no choice when faced with a pile of bills to pay, but Williams suggested a few other options for cash-strapped consumers.

“Take a look at some of your discretionary spending and see if you can reduce it to help pay down debt. It might be a side hustle or hobby that you can turn into extra cash before you dip into your 401(K), but yes, there are some very good reasons to take advantage of it. You can also borrow from your 401(K) and there are no requirements, okay, you don’t have to apply for the loan because it’s your own money, so there are advantages. I would just ask you to proceed with caution,” Williams said.

Penalties for withdrawing money from a 401(K) are high.

For those who withdraw money before age 59½, the IRS will take 20% on top to cover taxes owed, plus it will charge a 10% penalty.

This is a loss of at least 30% of the amount withdrawn.

For example, on a withdrawal of $10,000, a person would only pocket $7,000.

As Williams said, taking out a loan through a 401(K) plan would be the best solution for those who desperately need the money and have no other options.

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