Raiding Your 401(k) to Pay Bills: Weighing the Pros and Cons

Recent statistics on the prevalence of IRA and 401(k) raiding is alarming. It showcases, in a small way, some of the desperation inherent in our economic situation. Certainly tapping one?s 401(k) should be reserved for the most dire of financial circumstances, but where do you draw the line. Before we get into some of the expenses which would require an individual to raid his/her 401(k), let?s give a friendly reminder of the consequences.

Any 401(k) early distribution would require taxes to be paid on the amount withdrawn, according to you individual tax rates. In addition, you will incur a 10% early withdrawal penalty. That means if you have a $100,000 401(k) and are in a 20% tax bracket, you?ll end up paying about $30,000 for withdrawing early ($20,000 in tax and $10,000 in early withdrawal fees). The dark horse of early withdrawals is the amount you lose in investment income. A $100,000 401(k)?even if invested in today?s volatile market?would probably net you at least a semi-decent annual return, plus compounding year over year. Withdrawing early means missed investment income, including the compounding?which is the biggest deal of all.

Extreme caution is certainly needed when even thinking of tapping your retirement funds. With that in mind, here is an interesting list of the average American family budget. I?ve bolded items I would personally even ever consider funding with my retirement account.

• Mortgage/Rent
• Home Insurance
• Health Insurance
• Life Insurance
• Car Insurance
• Food
• Gas
• Cell Phone
• Electricity
• Water, Sewer, Gas
• Television/Internet
• Entertainment

That?s my personal list. Your list may be longer, but perhaps similar. As you can see, there are some things that, if pressed, I would live without. I would have to be pretty desperate to eat my children today and have nothing saved for my retirement years tomorrow.

Unfortunately, there really aren?t too many positives about having to drain your retirement account to pay daily, life-sustaining bills. The cons of such a decision may outweigh the need to keep the home, feed the children and otherwise survive. At that point, the products we provide become useless. However, there are a great many who likely need their retirement funds for general expenses. Let?s hope things get better before they get worse.

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Source: http://www.silverstone.net/tapping-your-401k-to-pay-bills/

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