No Matter What, Don't Tap Into Your 401(k) Early

(Forbes) There are countless reasons to spend that retirement fund. Kids in college. Your own college loans. Unexpected medical expenses. I've had most of these costly items, but still avoided touching my 401(k) kitty.

Yet I'm sympathetic to those who need the money now. Here are some of the most popular reasons, according to MagnifyMoney:

--  The two main reasons respondents cited for withdrawing money from their retirement savings are home ownership and personal debt.

-- According to the survey, 23% of those making an early withdrawal did so to help pay down non-medical debt, while 17% needed the money for a down payment on a home.

-- Likewise, Fidelity data shows debt and home ownership are driving participants to withdraw funds. A 2016 Fidelity participant panel survey among 743 respondents found 31% of participants use loans for paying down/paying off high-interest credit card debt, 24% for home improvement or repairs, 21% to buy a home or refinance a mortgage and 19% to pay outstanding bills.

How can you resist yanking 401(k) dollars when you're staring down big bills and debt? The reason to avoid early 401(k) withdrawals? You get hit with a triple whammy.

First, the proceeds will get hit with federal tax, which could be as high as 37%, depending upon your net gross income. Uncle Sam gets his cut. There's also an early-withdrawal penalty of 10% for those pulling money out before age 59 1/2.

Second, that's money that will not be compounding. When it's not there in your account, it's not growing, so your total balance at retirement will be smaller.

Third, since you're taking a tax hit and losing future access to compounded growth, it will be impair your standard of living in retirement. That means less money for healthcare, travel and other expenses.

Suppose you really need the money. What then?

Start early to set up an emergency cash fund. This money, which should be about three months of your annual salary, can be in an insured money market account or money market mutual fund. It's liquid, so there's no penalty for tapping it.

For most, having emergency cash accounts is the best thing to do -- while saving for retirement. They are easy to find -- and you can apply online.

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