Is It Ever a Good Idea to Withdraw from 401K?
To put my opinion in a short, succinct sentence, no I do not personally believe that you should ever withdraw money from your 401k account, unless it is for dire circumstances which cannot be financially remedied some other way, instead of raiding your dear life savings and safety mattress. This is something that we should all try to keep intact for as long as we possibly can, not only for the sheer financial security of it, but also for the tax implications and the numerous other cuts that government actually gives us as a reward for being disciplined retirement savers.
Even if it if for an emergency, such as losing your job, you must really consider the penalties that you may pay before considering this avenue of cash generation. Sure, there may be government relief efforts under way to help you withdraw money from tax sheltered savings accounts like 401k’s in dire straits, but even so, you still need to look at the big picture. Some of the considerations to make are the following.
How long will it take you to replenish this money that you have withdrawn, or borrowed against, your 401K? If you borrowed it instead of just withdrawing it, of course that is a better option because of course you have then had to pay yourself back with interest usually with most plans, but even if you borrowed you have to consider this. While that money is out, you are less that amount out of your account, which means you have less “principal” in your account on top of which to build your earnings.
If you’ve ever heard of the concept of compound interest, then you know the value of having a large beginning amount in your retirement account, since the more money you have, the more the money exponentially builds “on itself” to create true wealth. Withdrawing this money through borrowing it is less offensive than taking it out and not repaying it as a loan, but you are still reducing your compound interest because you are reducing that money for a period of time, which means it’s not growing.
Withdrawing and not paying it back is a whole different, and much worse, animal since you are taking the money out and not replacing it. How long has that money taken to build up to where it is now, and how long do you think it will take for you to get it back up that high again? When I think of this, it makes me shudder, personally! To think that you have to start all over is scary, and this money is supposed to be protected in the event of bankruptcy, so it is wise to always see what your other options are before you dip in to your 401k money.
