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Why Not Touch Your Retirement Account?

posted Jul 14, 2020, 4:56 PM by Jeff Wagner   [ updated Jul 14, 2020, 10:46 PM ]

If you have worked for a company with a 401K or started your own Individual Retirement Account (IRA), you are fortunate to have planned ahead for when you are unable or unwilling to work. Having that nest egg, no matter the size may give you some peace of mind. You may even think to yourself "If the fit hits the shan, I'm glad I have that money to keep me out of trouble." Although those funds are best left alone to build for our golden years, many of us give in to the temptation to borrow against or withdraw our retirement. While there are many reasons tampering with retirement is a bad idea, I can give you three that should turn you off the idea entirely.

  1. Pulling money out of retirement unplugs your hard-earned investments. When you see that total balance and think of what it can do for your current situation, you may not realize how long it took you to build. If you are struggling to keep up with monthly bills, if you have your eye on the latest toy, or if your dream home becomes a money pit, you may not consider the hours worked, the tough sales you closed, or the slow and steady market gains that fed your account. Once you pull the money out, the gains are lost and no more compounding interest. Finally, if it took you five, ten, fifteen, or twenty years to save, how old will you be when you finally put it back? Don't chop down the tree before you can eat the fruit. You can find another way.
  2. Have you considered the taxes and penalties? Would you borrow money at 30% interest to get out of your current situation? If the answer is no, then you definitely do not want to pay 30% to the IRS. Someone I know very well cashed in his modest $25,000 IRA in hopes of putting debt in the past. He had taken out $1-2K every couple of years to meet his budget and always managed to cover the taxes, but this was going to be the last time. He kept $6,000 aside to cover his potential tax bill, rationalizing to himself that giving that much to the government to access his own money was okay. Then he filed his taxes, and in spite of taking every deduction he could find, he still owed over $12,000 to the IRS. He was right back where he started, only now without that IRA. As we approach five years later, he still has a long way to go to get back.
  3. You may agree taking early disbursements from retirement is a bad idea, but then you hear about 401k loans. A great deal of US workers have 401K loans, and many think they are not so bad. You borrow from yourself and pay yourself back with interest. Sounds like a win-win on the surface, but 401k borrowers are violating both of my first two points. First, they unplug good investments that have taken years to build. Whether borrowing or withdrawing, your nest egg takes a hit. Second, when you leave your job, the loan becomes due immediately. Otherwise, it's viewed as an early withdrawal and subject to penalty taxes. Whenever I have lost a job, the last thing I was ready to do was to pay out a bunch of money.
There are some exceptions to my recommendation. If you face bankruptcy or the threat of homelessness, you may consider cashing out, but I would file bankruptcy before doing that. Retirement funds are usually not counted in BK court. If my family was days away from ending up on the street, that is the only time I would give in and take a disbursement. Right now under the COVID 19 pandemic, many are cashing in retirement thanks to policy eliminating the penalty. People who cash out now are still subject to income tax and are violating my rule #1 of unplugging growing investments.

I worked for a company without 401k for nine years. That's a good chunk of my working life without saving. One year led to the next, and I kept telling myself I would start an IRA as soon as things got better. Luckily along the way, I started listening to Dave Ramsey and Chris Hogan. Finally, I have a plan to save and Retire Inspired as the title of Hogan's book suggests. As a 40 something Gen-Xer, I am not even to the seventh inning stretch of life, and no matter where you are, it's not too late for you either.

That's why I started this post saying you are fortunate if you planned ahead. Many in my generation have not. In exploring investment accounts, it's easy to get caught up reading about trading stocks, working with brokerages, and timing the market. Don't fall into the analysis paralysis trap. Financial planners usually don't want to work with you unless you have some money to roll over. The thing to do right now is open an IRA, and start automated deposits. Just START. Don't wait for NINE YEARS as I did.

You can follow me to Wealthfront where they manage your first $5,000 in an automated account for free. After filling in your info, they ask a few questions to assess risk then take it from there. Start small if you must; drop $50 or $100 per month. Once you get your budget in line, you can try increasing. Whatever you do, start or continue investing. Keep it automated as possible to maintain growth out of sight and out of mind.



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