More Americans are dipping into their 401(k) accounts to make ends meet, but financial advisors say that's one of the worst mistakes you can make with your investment money. So why do people keep doing it? And how can you avoid it?
Many factors lead people to turn to their retirement savings for a quick fix. But you may want to think twice before you take out that loan.
"When you're looking at money you begin to see that maybe your check book is empty but that is full, so you start looking for options," says Vic Sullivan with Wells Fargo Advisors. He says dipping into your 401(k) early can be one of the worst financial decisions someone can make. And the penalties can be severe.
"Whatever money you pull out, it will be taxed at whatever income bracket you might be in and then they have to pay an additional 10 percent penalty," he said.
Last year, Americans withdrew an estimated $70 billion through 401(k) loans. That's 1 in 4 workers dipping into long term savings…many of them young professionals. But the added costs don't end there.
"You know have higher earning for that year than you probably anticipated. So what's going to happen when April 15th rolls around? Your taxes are going to be higher than you anticipated."
While some 401(k) plans don't allow for loans or offer hardship loans, Sullivan says one of the best things someone can do in need of emergency funds is apply for a bank loan.
"Yes, you would have to pay some interest on a bank loan, but in many cases, that interest is going to pale in comparison to the guaranteed cost of pulling money out of a retirement plan."
A recent study found that 401(k) withdrawals doubled from 2004 to 2010 going from $30 billion to $60 billion.
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