When (and when not) to raid your 401k - | WBTV Charlotte

When (and when not) to raid your 401k

CHARLOTTE, NC (WBTV) - Kathy and Skip Seda love their new home. She was ecstatic the first time she saw the place. He was crazy over the two ponds out back.

"It's my dream house and Skip's dream land, so we got the best of both worlds," Kathy says.

But financing their dream wasn't easy. Skip decided to dip into his 401k account for the down payment.

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

But raiding your 401k is not a decision to take lightly.

"It's really not a good idea to borrow from your 401k," says Murray Solomon, a financial advisor with Raymond James in Columbus. "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," he says.

And that message is echoed by David Moore, a financial advisor with Horace Mann Insurance. He says you can't be frivolous when it comes to your 401k. "It should only be used as a last resort," Moore says. "You shouldn't be borrowing from your retirement to pay off your credit card bills or to remodel your home."

So what are legitimate reasons to tap your funds? How about sending your kids off to college?

"Lots of people want to do it for college tuition. Much better ways to pay for college. I tell people no, no, no on that one," Moore says.

But Moore also says financing your own education is a different, because it adds to your net worth.

The first rule when it comes to dipping in to your 401k: remember why you established the fund in the first place.

 

"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," Moore says.

There are advantages of 401k borrowing, however, and they include getting your money without a credit check. There's no waiting for approval, and the loan can come at a lower interest rate than banks offer.

Disadvantages, besides what we already mentioned, include a failure to repay means a defaulted loan, which comes with tax implications. If you lose your job, the note comes due in 90 days. And there's this.

"Most plans will not allow you to continue to contribute to your 401k when you've borrowed from your 401k," Moore says. "The only way to make that up, when you can start contribution again, is to contribute more."

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