Leave Your Retirement Money Alone!
It’s happened to many people – you’re in a tight space for cash and no assets to pull from. So, withdrawing from your 401K might look attractive. There are loan systems in place, which allow you to borrow out of your 401K, and that’s not so bad too. You figure it will be easy to pay off your 401K loan with your payroll deductions. Since the interest payments are to yourself, you recoup some losses.
Let Us Count the Ways
Over and above the loan options that have been available since the beginning of time. And you have the opportunity to withdraw contributions out of a Roth IRA without incurring penalties – that’s contributions, not earnings. In addition to this, the IRS allows consumers to withdraw from their retirement funds sans penalties in the case of undue hardship. This can be for anything like a medical emergency or even your first home.
The SECURE act came to practice in December 2019. It brings even more ways to access your retirement funds. The law allows you to take up to $5000 from your retirement account without incurring penalties. This applies during the first year you have an addition to your family. That’s not all – if you’re married, you and your spouse can take out $5000 with the penalty-free distribution.
Don’t Fall For It
With so many ways available for you to withdraw funds from your retirement savings sans penalties, it sure is a wonder if you retire financially secure! There are many penalty-free options for withdrawing the funds along with ways that carry a penalty if you are below the age of 59 and a half. And the penalties come with income tax on the distribution.
All of these methods of withdrawing from your retirement do make it easy for you to do it. But the sane thing to do is not to touch your retirement money! Whether it is your Roth IRA, 401K, or traditional IRA, or any other retirement account you ave set up, there are very few excuses for you to use those funds.
Why You Should Leave Your Retirement Money Alone
Two words – compound interest. This mathematical wonder is your secret to financial happiness in retirement. It is a way of allowing even small sums of money to reach astronomical value, with time. Time is the critical element here, and the longer your funds attract compound interest, the happier your retirement will be.
Withdrawing from your retirement fund limits the power of compound interest. This essentially means you are removing wealth that possesses the ability to grow.
The Consequences Are Real
Withdrawing as little as $10K from your 401K, penalty-free, bringing your balance from say $80K to $70K, can add up to a loss of a whopping $38,686.85!! That means only $10K of that figure was what you withdrew, but the rest is the interest you might earn over the next 20 years.
Withdrawing from your retirement can spell trouble for your savings. As it might force you to save for a more extended period, thus pushing your retirement to a later date. This translates to more time working and less time in retirement bliss. Shouldn’t this be reason enough to not withdraw from your retirement funds?
It Isn’t as Simple as Replacing the Funds
Many people reason that if they need the funds now, they can simply withdraw it and replace it later. At a glance, this seems like a great idea – until you realize that it’s not. Even if you go ahead and replace the funds, know that you are not necessarily in the same boat from when you first withdrew the amount.
This is because there’s a probability that your money can be used for purchasing shares in your portfolio. But the prices might be higher than what it was at the time of withdrawal. Thus, your money loses value even if you put back the same amount in dollar-for-dollar.
In short, using your retirement funds is never a great idea. The minute you start breaking in your retirement money for expenses, it will become a habit, and you will not be saving enough for a rainy day. Think of your future and how it will all be worth it one day. Leave your retirement funds alone!
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