Hi guys, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com
When you’re short of cash, raiding your 401(k) plan is NOT a good idea. Here are two reasons why.
Penalties and taxes. If you’re under 59½ years old, you’ll be hit with a 10% early withdrawal penalty. There are some exceptions to the rule, but the money you take out will be taxed at your regular tax rate.
Lost opportunity. If your 401(k) earns an annual return of 5% over the next 30 years, an account balance with $50,000 could grow to over $215,000. A withdrawal taken and spent today will cost you that growth.
Bottom line: You got to find other ways to pay your bills, even if that means contributing less to your 401(k) in the short term. While it’s wise to take advantage of the company 401-K matching, you might consider reducing contributions that exceed the matching amount.
You might be thinking, what about 401-K loans? A 401(k) loan also has drawbacks. Again, money that’s not in your account won’t grow. So if you lose your job, you’ll have to repay the the loan balance or you’ll have to report it as taxable distribution with 10% tax penalty.
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Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com