Do not withdraw Funds from your Retirement Savings
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“Develop success from failures. Discouragement and failure are two of the surest stepping stones to success.” Dale Carnegie
World renowned for his inspirational teachings, many a successful individual has started out on a foundation of Carnegie’s lessons.
MAIN TOPIC: Read this if you are Desperate for Cash
Financial problems are a reality today. We are not out of the economic woods with unemployment hovering around 9% or worse in some areas, and many homes worth less than several years ago. Foreclosures are rampant.
If you are on the brink of a financial disaster, and have a 401(K) or IRA from an employer, you may be tempted to withdraw those funds. In fact, last spring when I was volunteering for the IRS, preparing tax returns, I came across more than 1 individual who cashed out their retirement funds.
There are HARDSHIP standards which let you cash out your retirement account before the mandatory retirement age. According to the 401K Help Center:
“The following items are considered by the IRS as acceptable reasons for a hardship withdrawal:
- Un-reimbursed medical expenses for you, your spouse, or dependents.
- Purchase of an employee’s principal residence.
- Payment of college tuition and related educational costs such as room and board for the next 12 months for you, your spouse, dependents, or children who are no longer dependents.
- Payments necessary to prevent eviction of you from your home, or foreclosure on the mortgage of your principal residence.
- For funeral expenses.
- Certain expenses for the repair of damage to the employee’s principal residence.”
Here is why you DO NOT WANT TO WITHDRAW FROM YOUR 401(k) OR IRA:
Hardship withdrawals are subject to income tax and, if you are not at least 59½ years of age, the 10% withdrawal penalty. You do not have to pay the withdrawal amount back.
HERE IS HOW MUCH YOU LOSE:
Withdraw $2,000.00 and take away 10%, that leaves $1,800.00. If you are in the 28% tax bracket, subtract another $560.00. Now you are down to $1,240. And that is BEFORE state and local taxes.
In summary, withdraw $2,000.00 and walk away with less than $1,240.00. Does that sound like a good deal to you?
If you need more motivation, consider this, when you take out cash from your retirement account, not only are you paying fees and taxes, you are losing money that is VERY HARD TO REPLACE. Left in place, you are providing for your future and giving your funds a chance to grow TAX FREE.
In fact take that $2,000. Leave it in a stock index mutual fund for 20 years. With an average 9% return (long term historical return from stocks), in 20 years your original $2,000.00 is worth $11,208.82. Compare that with the $1,240.00 value NOW.
PRACTICAL APPLICATION: TAKE EXTREME MEASURES
Before even THINKING ABOUT withdrawing funds from your retirement account, do everything you possibly can to CUT EXPENSES DRASTICALLY. Leave no alternative unexplored.
My blogging colleague Jacob, at Early Retirement Extreme is an expert at cutting down expenses to the bare minimum. You would be surprised how little one needs to live on!
Before you TAKE MONEY OUT OF YOUR RETIREMENT ACCOUNT, follow these steps:
Reduce auto costs, get rid of one car or sell expensive car and buy CHEAP one.
Sell your home, move into an apartment.
Sell your stuff on eBay and Craig’s list.
Do all cooking from SCRATCH; no prepared foods. Cut food bill way down. Substitute beans & rice for meat!
Enlist your kids and get their ideas on cost cutting. No extravagances for them.
For an indulgence, bake a cake, take a walk, have a picnic!
Call all service providers and insurers to negotiate lower rates. Cut out cable, read instead. Cut out all subscriptions.
Read the list of blogs at the end of this article for more great cost cutting resources.
Don’t forget considering ALL ALTERNATIVES to make extra money!
Do your best to withstand the current financial hardship with PERSISTENCE, RESILIENCE, CREATIVITY, & PATIENCE. If you take action, your situation will improve. Borrowing from your future is a step to avoid AT ALL COSTS!
Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.
Make a list RIGHT NOW of every way possible to cut expenses.
Make a second list of every way you can earn extra income. If you are unemployed, be sure to check out TIP #2 from this article. Consider a 2nd job or freelance/entrepreneurial activities.
Write in with your cost-cutting stories and any related questions. I am happy to help!
SAVING & COST CUTTING ARTICLES FROM WELL REGARDED PERSONAL FINANCE BLOGGERS:
One Money Design
Not Made of Money
Little House in the Valley (get her free eBook on credit)