Should You Tap Into Your 401(k) Plan?

January 27th, 2010

The 401(k) plan is for your retirement, so you need to consider a withdrawal’s impact on your future retirement.  Also, since withdrawals are taxable, you probably won’t be able to keep the entire amount that is withdrawn.  If you are under 59-½ years of age, the withdrawal will also be subject to a 10% penalty and, if your state has an income tax, you will need to also consider the state’s tax and penalties on withdrawals.

If the cash need is short, you might inquire about a loan from the 401(k) plan.  This will allow you to pay it back, and the interest paid goes towards your retirement.  One word of caution about loans; if you lose or change your job, the loan is accelerated and must either be paid back in full or treated as a distribution at that time.  If your 401(k) account includes elective deferrals (contributions that you have already paid taxes on), you may qualify for a hardship withdrawal of your post-tax contributions.

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