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Avoid raiding 401(k) to make ends meet

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in Small Business Tax

Faced with tough financial times, more people are raiding their 401(k) accounts as if they were piggy banks.

It may seem like a quick and easy fix: Borrowers don’t need a good credit rating, and the interest rates are low. But according to Jonathan Clements, personal finance columnist for The Wall Street Journal, taking out a loan or hardship withdrawal from your retirement fund isn’t the best strategy.

“The trouble is, the money has to come out of that 401(k) plan, which means it’s not earning investment gains,” he said recently on National Public Radio. “So you’ll end up with less money at retirement.

“Moreover, if you leave your employer, that 401(k) loan becomes immediately payable. If you can’t come up with the cash, you’ll pay taxes and tax penalties.”

Clements’ advice: “Look at monthly obligations that give you little financial leeway: things like cell phones, satellite radio, cable television. If you find you’re strapped for cash every month, see if you can give yourself more financial breathing room by either getting rid of or reducing these monthly obligations.”

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