With the downturn in the economy and rising costs, many Americans are feeling the pinch in their pocketbooks. As a way of getting extra money to pay bills, some are thinking about pulling their money out of their 401(k)s. While this may help short-term, there are serious drawbacks you need to consider.
• First and foremost is the investment penalty of selling at the bottom of the market. You are selling your shares at the worst time possible, getting the lowest return on your dollar.
• If you are under the age of 59 1/2, you are subject to an early distribution penalty of 10 percent. Seeing that money vanish right off the top is a hard pill to swallow.
• The amount of money you receive as a final disbursement is still subject to income tax (since you are now receiving money that was set aside pre-tax from your paychecks). This often amounts to around 20 percent of the taxable amount, and slices out another chunk.
So, if you are contemplating closing out your 401(k) to help you through the current downturn, just be aware that it is not as simple as asking for and receiving your entire contribution. Consult with your accountant or retirement specialist to go over any questions you may have and other approaches to meet your short-term money needs.
[Ed. Note: The economy may be in an uproar these days, but there are still ways for you to make money. The real secret to banking riches in today's market is to look in unconventional places. You can access one of these "hidden treasure troves" just by keeping an eye out for "Red Flag" alerts. Find out how to spot those Red Flags, and how they can help you prosper, right here.]
Similar Articles:
- If You’re Late on Your Taxes… – Tomorrow’s the deadline for filing your taxes, and you’re not ready. Maybe you had personal problems…
- Who Do You Work For? – As a development manager for a real-estate project I consult with, SB takes direction from three peo…
- Google’s Duplicate Content Penalty – Google doesn’t like twins much. That is to say, Google penalizes Web pages that it deems to be near-…
- The 80/20 Rule and Investing – You are probably familiar with the Pareto Principle, also known as the 80/20 Rule. It states that 80…
- Dear ETR: “How can I cut back on Gmail spam?” – “In your article about getting rid of excess spam, you stated that Google’s e-mail service has excel…
- A Dollar Saves the Day – I’d lost $8,000 and neither the sending nor the receiving bank knew where it was. Lost in the bankin…
- The Importance of Living Rich – No matter how much you make, you can live just as well as a billionaire. If you realize that you can…
Too many everyday, individual investors are failing to see the gift the financial gods have given us. If you do have a 401k (or any other pretax retirement account) you would be a moron to not be contributing the maximum that you can afford.
Diversify across equity positions, cross your arms, and put up with this volatility. Ever bear market has been followed by a bull market so this too shall pass.