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tr, 2012– During challenging economic times, it can be tempting to forego
contributions to your retirement account, or even to pull money out of an
existing account to cover other expenses. Some plans allow you to withdraw
money for specific reasons (i.e. to prevent eviction or foreclosure), but there
can be some pretty tough financial consequences for tapping or ignoring your
may seem far away,” said Steve J. Bernas, president & CEO of the Better
Business Bureau serving Chicago and Northern Illinois. “But it is extremely important to save for the future while
navigating everyday finances.”
Investor Education Foundation offers the
following reasons to keep your retirement savings intact (note these rules are
● 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.
● Opportunity Costs— The repercussions of withdrawing funds from your 401(k) could be
enormous in terms of lost growth opportunity. For example, let's assume you are
30 years old, and have a 401(k) balance of $20,000. 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.
● Opening Assets to Creditors—Under
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. However, if you take
money out of your retirement plan through a loan, hardship or regular
withdrawal, your creditors can go after that sum.
Additional warning: watch out for
products that allow you to withdraw your retirement funds and reinvest them
elsewhere. FINRA warns that 72(t) withdrawals from an IRA and 401(k) debit
cards can deplete your retirement savings and damage your retirement security.
Instead of taking money out of
your retirement plan, look at other ways to save or borrow (tightening your
belt on expenses, taking advantage of employer match programs to keep funding
your IRA or 401(k), contributing pre-tax dollars to a retirement plan, etc.)
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.
For more consumer tips, visit http://www.bbb.org/
As a private, non-profit organization, the purpose
of the Better Business Bureau is to promote an ethical marketplace. BBBs help
resolve buyer/seller complaints by means of conciliation, mediation and arbitration.
BBBs also review advertising claims, online business practices and charitable
organizations. BBBs develop and issue reports on businesses and nonprofit
organizations and encourage people to check out a company or charity before
making a purchase or donation.