Please Help – I need advice about taking money out of a retirement account?
I am not sure where to begin but my husband and I relocated to Rhode almost a year ago. I have been trying to start my business here which has been terribly difficult. After seven months of constant seeking my husband finally found a job that is earning him less money than I made at my first job. Needless to say were are not able to cover our monthly bills and have gone through most of our savings. We have a first and second mortgage but no credit card debt. The only money we have available is what is in my husband’s 401k plan. We would never think of touching this but it is our last resort. Selling our house at this point will be disasterous. We were waiting to do this until we absolutely had to (the next month or two)but I am afraid with stocks falling if we wait that long we will lose money that we need to survive. If we are going to take this money out what kind of penalty do we pay?
Where should we put this money so we can access it as needed and still earn interest?
What money? If you do this, you’ll get VERY little:
“If your 401(k) plan allows loans (most do), you can borrow up to 50% of your vested account balance or $50,000, whichever is less. You usually have a maximum of five years to repay the loan, unless you are borrowing for a first home, which allows a longer payback.
Before we get into the pros and cons, one caveat up front: If you’ve got a financial emergency, and your only choice is between borrowing from your 401(k) plan or pulling the money out in a hardship withdrawal before you’re age 59 1/2, it’s a no-brainer. By all means, borrow the money. That’s because there is no penalty on borrowing, but there is a 10% penalty on early distributions.
Now, let’s go through the pros and cons of borrowing from your 401(k).
The pros:
There is no credit check. You don’t have to apply for the loan, and you can make plans knowing that you will get the loan.
There is a low interest rate. You pay the rate set by the plan, usually a couple of percentage points above the prime rate.
It provides a great return. If your money market account is earning 3% and you pay yourself back at 6% or 7%, it looks like a good deal.
The interest is tax-sheltered. You don’t have to pay taxes on the interest until retirement, when you take money out of the plan.
It’s convenient. Some plans only require you to make a phone call, while others require a short loan form.
The cons:
About that credit check: Of course there isn’t one. You’re not borrowing anything. You’re spending your own money.
You’re losing interest. The net effect is that you have less money to invest and to earn interest. The money you borrow — or take out — of your retirement plan no longer appreciates in value from interest, dividends and/or capital gains in conjunction with the rest of your investment portfolio. Remember that you aren’t really borrowing. All you are doing is using money from one account, such as your checking or savings account, to repay the money you borrowed from your 401(k). And when you take money out of that checking or savings account, that money loses interest, too.
It’s not tax-sheltered money anymore. Whether you repay the 401(k) loan out of your salary or from a bank account, those payments are all made back into the 401(k) with after-tax dollars. So, let’s say your monthly interest payment is $300 and you’re in the 28% tax bracket. You’ll have to make $416 in gross earnings to make the $300 payment. Then, when you retire and take withdrawals, you pay taxes yet again.
Unless you repay the loan, it is considered a premature distribution. You would owe federal and state income taxes as well as that 10% penalty if you are under age 59 1/2.
The loan isn’t tax deductible. It’s considered a consumer loan, so there is no tax advantage.
It affects your psychology toward retirement saving. If possible, your retirement money should sit untouched until you retire. It’s too easy to get in the habit of dipping into your 401(k) instead of saving for things you need along the way. Keep your 401(k) in a loan free zone.
The bottom line:
It’s better for most people to take out a home-equity loan if they’re homeowners. In most cases (unless you’re borrowing more than the value of the home), you can deduct the interest on your taxes.
Another option is to use money currently sitting in a low-interest rate savings account or money market fund.”
http://moneycentral.msn.com/articles/retire/basics/4714.asp
You will pay a 10% penalty plus the withdrawn amount becomes taxable income for that year. See http://www.401k.org.
If I’m not mistaken, you can borrow against you 401k. However, if you make a withdraw there will be a huge tax penalty. The only exception is rolling it into another retirement account. For the best answer, contact your 401k benefit administrator who can properly advise you of your options. Best wishes.
Sounds like you are in a tough situation. I am no finance guru, but I do listen to Suze Orman a lot and read a lot of financial books as well as handling the finances with my husband and myself. I also took a tax class to become certified tax return processor… I am a student of money and wealth as well.
Depending on how old you are and how much you have in your 401(k) will make a difference when considering cashing it out – which is always touted as a bad idea. You will pay regular income tax on the money if you do take it out and a 10% fee for taking it out early. Plus if you have a lot in there it may put you in another tax bracket putting more taxes on you. Plus you lose the compounding aspect of investment for the money put in which translates into more money lost…
Is there a way for you to go back to work, or work part time in addition to your business, to increase your household income? Can your husband continue to look for a better paying job, or increase his value (thus his income) at his current job? Have you explored a home equity loan or line of credit?
Credit cards are a last resort emergency fund if you have gone through your savings…
I would suggest talking with a professional financial advisor to look at your options…
If I can be of further assistance let me know!
http://www.successfuldiligence.com
Both answers mentioning loans are WRONG. Many 401(k) plans allow loans WHILE you work for the company. By law, such loans are DUE IN FULL within 60 days of leaving the job. NO 401(k) CAN allow loans after you leave the company. Withdrawing money will be MORE disastrous than selling your house.