The retirement plan 401 (k) was created in order to financially ensure future retirement for those who are still young and working. This retirement plan has a great advantage over some other retirement plans. He offers for several decades, investing relatively small amounts, to obtain a significant increase in savings to ensure a comfortable old age after retirement due to compound interest. However, one of the big mistakes of young retirement savers is out of their current financial obligations.
Credit card debts force a quarter of young Americans under the age of 35 to withdraw money from their retirement account 401(k). The total debt on credit cards of this category of citizens is already more than $ 2 trillion, and each of them owes an average of $ 3,700 to credit card issuers.
Another common reason for this is student loans, which for many years have hampered the financial freedom of graduates of educational institutions. However, this way of solving financial problems is not justified for several reasons, which we will consider further.
Why one should not take your retirement savings?
The main disadvantage of early withdrawing money from the 401 (k) retirement plan is the colossal loss of money. If you withdraw money from your retirement account before you turn 59, you will have to pay a 10% penalty for early withdrawal. In addition, at the end of the tax year, you will have to pay 25% of income tax, as well as a state duty of 6%.
So it turns out that you immediately lose almost a third of the amount withdrawn from the Ruth 401(k) retirement account for taxes and fees. But this is only a small part of the losses that you will suffer if you make the same retirement savers to cover your financial obligations.
Any other use of a retirement savings account, except for its intended purpose, has a huge disadvantage. Here, the key role is played by the duration of investment in the pension plan 401(k) and the compound interest.
Even with a small rate of return of 6% per annum, your losses in 30 or 40 years will amount to several tens of thousands of dollars. For example, if you withdraw 10,000 thousand dollars, of which only less than 7,000 dollars will be yours, in 40 years you will lose about 100,000 dollars! The average account in the 401k pension plan is $ 10,500 now.
Think about these numbers, which is why withdrawing money from your retirement account is one of big mistakes of young retirement savers that you should avoid so as not to incur such big losses in the future. Even if you later return them to your retirement account with time, in any case, you have already lost taxes and fees, and also did not receive profit from the working of a compound interest of a larger amount.
As you understand, the sooner you start investing money in the 401(k) pension plan, the more secure your old age will be after retirement. Why do people use their retirement accounts so unreasonable? The majority simply does not know about the real consequences of such actions and do not realize all the scales of unpleasant outcome. Also some of the quarter of young Americans simply has nowhere to go for financial help because of the lack of other options to pay off debts.
When it makes sense to use your retirement account ahead of time?
Despite all the negative financial consequences, in some cases it still makes sense to use the money from your retirement account 401(k). It may be acceptable if you do not have other options to find money to repay your debts, and you are threatened with bankruptcy, which for many years will ruin your credit history and bring down your credit score.
In this case, it’s better to lose 2000-3000 dollars on taxes and fees once rather than stay for a few years with little or no opportunity to receive any funding for your needs or get draconian conditions. If something happens to you and you need, for example, urgently pay medical bills, then it is better to be able to get funding for these expenses.
However, it should be remembered that such a way to solve financial problems as withdrawing money from your retirement plan should be the very last recourse, when all possible other options have been exhausted.
How to avoid big mistakes of young retirement savers
If you want to avoid getting into such a situation when you have to withdraw money from your retirement account, then first of all you should take care of creating a savings account in case of various unforeseen expenses.
Go into budgeting to understand how much money and for what you spend. This will allow you to see opportunities to save additional funds that you could use for a savings account for emergencies. Keep track of your expenses for a month, and then you see what you could refuse.
In addition, if you want to get more funds for your retirement, it is worthwhile to constantly refill your retirement account, at least in small amounts. Compound interest will do its good work and each additional thousand dollars will add you significantly more in the long run. Systematically add annually to your pension plan and the result at retirement will pleasantly surprise you.
In the event that you did not have time to create a sufficient amount of savings, and an urgent need for money has already arisen and there are no other options, then instead of withdrawing money from your retirement account, it is better to take it from there on credit. Pension plan 401(k) allows you to take your pension savings on credit.
You will also pay interest, just like a regular loan, but at least it will be your money that will work for you in the long run. In any case, you must understand and calculate all the aftermath when you take any loan and credit from the 401(k) pension plan is not an exception.
The less money you borrow and the faster you return it, the less money you will lose in the end. If you want to know how to properly handle a credit card, so as not to create a large debt on it, read our financial blog. In it you will find a lot of useful information regarding credit, loans and everything related to personal finance.
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