Is it okay to dip into your 401K? - WTVM.com-Columbus, GA News Weather & Sports

Is it okay to dip into your 401K?

By Chuck Leonard - email 

COLUMBUS, GA (WTVM) - Putting aside money for retirement is a great way to save for the future. But what if you need the money now? Should you tap into those savings?

Kathy and Skip Seda did and have a new house to show for it.

Kathy went nuts the first time she saw the home in rural Lamar County, GA. Skip was ecstatic over the two ponds out back. "I don't care if I've got 15 square feet of land to stand on, as long as I've got some land to fish in."

Financing their dream took a little ingenuity and consistent saving. Skip got the down payment from his 401K account.

"My goal was to have enough money there that when I retired then I could move in where I always wanted. And I saw an opportunity to get there 20 to 25 years earlier, so I just didn't see how we could pass that up."

Skip's decision ran counter to the mantra of his financial advisor, Murray Solomon. "It's really not a good idea to borrow from your 401K." 

Solomon works with the Raymond James firm in Columbus.  He stresses the importance of looking elsewhere first. "If you can find other means to get your money, for what period of time you may need it, it's better to leave your money in your retirement plan."

That message is echoed by David Moore, a financial advisor with Horace Mann Insurance. He offers specific examples. "You shouldn't be borrowing from your retirement to pay off your credit card bills or to re-model your home. It should only be as a last resort."

Depending on who you ask, there are legitimate needs for tapping into your fund. Solomon suggests funding your child's college education, but Moore disagrees.

"Lots of people want to do it for college tuition. There are much better ways to pay for college. I tell people no on that one, and I get a lot of questions about that."

Moore says financing your own education is a much better option, because it improves your worth.

Both men say it's important to remember why you established the fund in the first place. "Folks immediately think this is a source of money that they can just tap", says Solomon. "The whole idea is the tax benefits of a 401K are to encourage you to build that money for retirement, not to take it out earlier."

Advantages of 401K borrowing include getting your money without a credit check. There's no waiting for approval.  The loan usually comes at a lower interest rate than a bank or credit union can offer, and you can get your cash instantly.

Disadvantages include a minimum loan, in many cases, of at least $500 to $1,000.  Failure to repay means a defaulted loan, which comes with tax implications.  And if you lose your job, the note is due in 90 days.

Moore offers another caveat."Most plans will not allow you to continue to contribute to your 401K when you've already borrowed from it,  The only way to make that up, when you can start contributing again, is to contribute more."

It's best to do your homework if you're thinking about the 401K option.  Consult a knowledgeable source, a financial advisor or maybe even your human resources director. And don't forget the words of Murray Solomon who says if you're going to gamble, do it in Vegas not with your future.


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