IF YOU RUN INTO A FINANCIAL BIND, IT CAN BE VERY TEMPTING TO THINK ABOUT RAIDING FUNDS FROM YOUR 401(K) OR SIMILAR RETIREMENT ACCOUNT TO MEET YOUR NEEDS.
However, taking out money before you turn 59½ can be costly. First, since money in a traditional 401(k) has not yet been taxed as regular income, you’ll have to pay federal income tax on the amount you take out. In addition to that, you will most likely also have to pay a 10% penalty for that early withdrawal.
If that’s not painful enough, consider that you’ll also lose the compound interest that money would have earned if left in the account until you retire.
However, there are times when you might feel there are no other options other than taking money from your 401(k). In these instances, you should talk with your retirement plan administrator about any possible cases where the early withdrawal penalty might be reduced or whether the withdrawal might be treated as a loan that you could pay back to yourself with interest. Another option would be to check with your financial institution about getting a personal loan, which would keep you from having to use your retirement funds.
If at all possible, you should keep your retirement funds for just that – money you’re saving to meet your needs when you retire.