During tough economic times, it’s tempting to forgo contributions to your retirement account or to even withdraw money from it. Some plans allow you to use these funds in case of a financial hardship. Although the option is available, tapping into your retirement plans can lead to tough financial complications. The Better Business Bureau (BBB) urges consumers to manage retirement plans wisely and to keep these savings intact.
“It can be hard to balance saving for retirement along with other expenses such as rent or a mortgage, transportation and living expenses,” said Steve J. Bernas, president & CEO of the Better Business Bureau serving Chicago and Northern Illinois. “However, continuing to save will be beneficial in the long run.”
The BBB recommends the following advice, from the FINRA Investor Education Foundation:
- Be aware of tax liability. Unless you're over the age of 59 ½, you will not only have to pay income taxes on the amount you withdraw, but you will also be subject to a 10% tax penalty. In most cases, your employer will withhold 20% in federal taxes, so the amount you receive will be significantly lower than the amount you requested.
- Withdrawing funds decreases opportunity cost. The repercussions of withdrawing funds from your 401(k) could be enormous in terms of lost growth opportunity. If you leave that money alone and your account averages a 6% rate of return over the next 32 years, your balance at retirement will be $129,068 when you're 62—even if you do not make any additional contributions during that time. If you take it out, you'll have nothing. Even if you have a shorter time horizon, you will forgo significant savings opportunities by taking money out of your 401(k). For a 45-year-old, that $20,000 will grow to $53,855 in 17 years.
- Open assets to creditors. Under the Bankruptcy Abuse Protection and Consumer Protection Act of 2005, your creditors cannot touch your 401(k) balance or similar retirement savings account—even if, as a last resort, you file for bankruptcy protection. Balances in traditional and Roth IRAs are also protected up to a limit of $1 million. If you take money out of your retirement plan through a loan or a hardship or regular withdrawal, your creditors can go after that sum.
- Watch out for retirement plan products. Watch out for products that allow you to withdraw your retirement funds and reinvest them elsewhere. 72(t) withdrawals from an IRA and 401(k) debit cards can deplete your retirement savings and damage your retirement security.
- Take advantage of employer match programs to keep funding your IRA or 401(k). You may also be able to borrow from your 401(k) without actually taking a withdrawal; this would reduce your tax burden and would likely come with a lower interest rate than a bank loan. Check with your plan administrator on whether or not this option is available.
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The BBB is a non-profit, non-governmental organization. It is supported by businesses to protect consumers against scams and other unethical business practices. The group accomplishes this by educating both consumers and businesses, and by highlighting trustworthy businesses. By developing reports and ratings on businesses and charitable organizations, the BBB encourages people to use these as resources and referrals to utilize the free services before making a purchase or donation. The BBB helps resolve buyer/seller complaints through its alternative dispute resolution process. In 2013, the BBB provided more than 22,600,000 instances of service. Over 80 percent of consumer complaints to the BBB were resolved. The Better Business Bureau serving Chicago and Northern Illinois is a member of the international BBB system that services the United States, Canada and Mexico.