It’s essential to save money for retirement and a 401(k) is a great tool to achieve your retirement saving goals. But your situation may change if you experience financial hardship before you’re ready to retire. Or maybe you are retired but you want to get the most bang for your retirement buck. You might consider taking money out of your 401(k) to make ends meet or to make the best long-term investment for your heirs, but is it the right financial decision for your and your family? Taking money out of your 401(k) is a bold move and you need to decide if it’s worth it.
First you need to evaluate your situation: why do you need to take money from your 401(k)? The answer always depends on personal circumstances, so evaluate your options to help protect your future.
Scenario A: You’re experiencing a financial hardship and you are not retired.
Career paths are not as stable and many people are experiencing job changes.. If your income shifts, it may be tempting to take money from your 401(k) to pay off a high mortgage or credit card debt. But a 401(k) is not an emergency fund; it is for retirement, especially for those who have many working years ahead. So, what’s the solution?
Instead of liquidating your 401(k) to pay off debt, think of other ways to earn money. Consider working a sidejob such as tutoring or caregiving. Paying the bills with income from short-term jobs can protect your savings. However, due to demanding work schedules or a busy family life, increasing the hours you work isn’t an option for everyone. In that case, you could take a smaller amount from your 401(k) to help pay the bills over the next couple of years. Taking out $5,000 or $10,000 will buy you time so you can figure out other ways to increase your income Liquidating your 401(k) would dissolve any retirement savings and cause you to take a large tax hit. Instead, take out small amounts while you look for new sources of income.
Scenario B: You are retired and wondering when you should start withdrawing from your 401(k).
You have saved a substantial amount of money in your 401(k) and want to make sure it’s accessible to heirs at the best tax rate. It may be tempting to take out money while your tax rate is low, but look at your long-term goals and do the math.
If you’re retired and want to take money from your 401(k) to invest elsewhere, there are a few things to consider. It’s likely that if you keep money invested in the stock market, it will produce returns. It may not happen this year, but you can expect the money to grow between 8 and 10 percent over a period of time. However, if you take money out of your 401(k) and put it in a bank account, you won’t earn anything. So what’s the better investment? Should you double your amount and then pay more tax, or take a big tax hit now and have no growth? If you keep the money in your 401(k), you will pay more taxes or your heirs will pay more taxes, but your net amount will also be higher. .Also, if you leave your inheritance to two heirs rather than one, it will split the amount and they will face fewer penalties.
Anyone with a substantial amount of money in their 401(k) should have conversations with several investment professionals. You don’t necessarily need to give them control but go ahead and pay for their time. Listen to different opinions so you can minimize taxes, increase growth or bring home a higher dividend, whichever is your goal. This is a highly specific decision that depends on your current income and how much you’re willing to invest long-term.
In the meantime, the smartest move is to figure out how to reduce your living expenses to increase your cash flow.
WSB Radio’s Ilyce Glink Show – January 26, 2014
To find out more about refinancing, click the audio link below to listen to the full Ilyce Glink Show on WSB Radio, or go to iTunes and download the show to your handheld device.
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