Welcome to Day 20 of 30 Days To Your Financial Freedom Challenge!
If you’re one of the 40 percent of the population that has a retirement account at all, aside from social security or other government benefits, you’re in luck because you have options. However, it’s not really a good option to touch your retirement accounts during a financial crunch. Here are 7 reasons why you should avoid touching your retirement account.
Reason #1 401K Loans Have Too Many Catches
The rules and processes for borrowing against your 401K makes it really difficult. If you terminate your employment, you’ll have to pay that money back immediately, even if you’re laid off or fired.
Reason #2 You’ll Suffer Penalties
Of course, if you tap into that money, you’re going to end up penalized. How much depends on the type of retirement accounts. Money saved pre-tax will incur a penalty plus taxes. Money saved post-tax will still acquire a penalty that makes it unpleasant to use. There are specific ways to avoid penalties, though, so look into your particular account to find out if you can access it without.
Reason #3 You May Pay More Income Taxes
Most retirement accounts will require you to pay ordinary income tax on the withdraws. If your financial crunch happens at the end of the year, you’ll end up paying more income tax than if you earn less overall in the year you need to access the money.
Reason #4 You Will Not Reach Your Retirement Goals
Money acquires worth in savings due to compounding interest. If you take money from the basis, you’re going to mess up your earnings.
Reason #5 Your Retirement Accounts are Protected
Even if you have to file bankruptcy, which is actually a much better solution to some financial issues than tapping into your retirement account, the money is protected and safe from collectors and the government.
Reason #6 Your Retirement Savings is Not for Emergencies
The truth is that money you’ve saved for retirement is for exactly that: retirement. It’s not for emergencies, and that is why the accounts are protected. When you’re old and need to retire, you’re not going to have a way to earn an income.
Reason #7 Only Do This for Life and Death
Before you touch your retirement accounts, try to find every single other way to get help, including bankruptcy. The only exception is if it’s a life and death situation, and you’ve turned over every single rock to find alternatives.
When over 35 million “baby boomers” don’t have savings for retirement, if you do, you’re doing great. Don’t mess it up. That money is for your retirement and not for spending now, even during a financial crunch. Make it your policy to pretend that money does not exist until you retire or reach the age that you don’t pay the penalty for taking the money.
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