With the downturn in the economy and rising costs, many Americans are feeling the pinch in their pocketbooks. As a way of getting extra money to pay bills, some are thinking about pulling their money out of their 401(k)s. While this may help short-term, there are serious drawbacks you need to consider.
• First and foremost is the investment penalty of selling at the bottom of the market. You are selling your shares at the worst time possible, getting the lowest return on your dollar.
• If you are under the age of 59 1/2, you are subject to an early distribution penalty of 10 percent. Seeing that money vanish right off the top is a hard pill to swallow.
• The amount of money you receive as a final disbursement is still subject to income tax (since you are now receiving money that was set aside pre-tax from your paychecks). This often amounts to around 20 percent of the taxable amount, and slices out another chunk.
So, if you are contemplating closing out your 401(k) to help you through the current downturn, just be aware that it is not as simple as asking for and receiving your entire contribution. Consult with your accountant or retirement specialist to go over any questions you may have and other approaches to meet your short-term money needs.
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