One of the best pieces of financial advice ever given is to build up an emergency fund in the event something unexpected happens and you need some fast cash. Unfortunately, not everyone prepares such a fund and is therefore stuck looking for other sources of income when the unexpected hits. One such fund that tempts many to tap into is their 401(k) or other retirement plans. With retirement positioned as far off lifestyle for many, it can’t hurt to take out a little now, right? Wrong.
While emergencies call for quick-thinking and fast access to financial resources, it is crucial that you refrain from tapping into your retirement fund. Here are several reasons why:
Your nest egg will take an immediate 10 percent hit. When you withdraw from your 401(k) account before 59 ½, you are automatically subjected to a 10 percent penalty fee. However, there are certain circumstances that can exempt you from the penalty and some employers allow for a hardship withdrawal.
You’ll owe taxes on that withdrawal. When you contribute to a 401(k) or other traditional individual retirement account, you avoid paying taxes on those contributions. Eventually, you will have to pay them but you will pay them even sooner if you withdraw funds before 59 ½. In addition, you’ll have to pay your ordinary income tax on that amount.
You’re jeopardizing your future wealth. If you withdraw your retirement money early, you prohibit it from compounding and accumulating over time. By the time you retire you’ll have a comfortable chunk of change in your savings. Don’t diminish it by emptying it out for quick cash.
For more information on why you shouldn’t use your retirement savings for anything other than retirement, please visit US Money News.