Leave Your 401(k) Alone: Explore These Options First

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The money in your 401(k) is just sitting there, waiting for the day you retire. When you need cash now, it’s tempting to reach into your retirement account and take out funds to pay off your credit card, cover an unexpected car repair or pay for a pricey vacation.

But, since that money is there for retirement, the Internal Revenue Service has pretty strict rules about using it before you hit the golden age of 59 1/2 years old. Unless you meet certain requirements, you’ll end up owing income tax on the amount, plus an extra 10 percent penalty. When you need money, there are other possible options to consider.

Tap Into Other Savings

Before your reach into your 401(k), look to your other saving accounts, if you have them. You’ve already paid the income tax on the money in a regular bank account or certificate of deposit and won’t owe a penalty tax if you use it. The amount you should have in an emergency savings account varies depending on who you ask. It’s generally a good idea to keep between three and nine months’ worth of income tucked away, according to Bankrate.

Take Out a Loan

Some 401(k) plans let you borrow money from your account, then repay yourself, with interest. A 401(k) loan might seem ideal, but it has its risks, according to CashNetUSA. If you don’t pay it back, you’ll owe the 10 percent penalty in a lot of cases, according to the IRS. Depending on the rules of your plan, if you quit your job before you pay back your loan, the entire amount becomes due right away.

Another less expensive loan option is to borrow from a family member or friend for a low interest rate. To avoid any hurt feelings or misconceptions, put all the loan details in writing, including a repayment plan that lists the amount you’ll repay each month and how long it will take to pay back the loan.

Reach Out to an IRA

If you don’t want to borrow money and don’t have a sufficient amount stashed away in regular savings, another option is to tap into a Roth IRA. Roth IRAs are meant for retirement, but have different rules than 401(k) plans or traditional IRAs. You pay income tax on the amount you contribute before you contribute it. That means when you withdraw your original contribution, you owe no income tax on it and won’t have to pay a penalty tax, either. You might have to pay a penalty if you take out an amount your Roth IRA earned, though. For example, if you originally put in $1,000, and you take out $1,100 two years later, you’ll owe tax on $100.

Find a Way to Earn Extra Income

Earning more income lets you pay down your debts and put more money aside in case you’re ever in a pinch again. You don’t have to get a part-time job at the local mall or beg for a raise to earn a bit more each month. If you have a special skill, you can monetize it in several ways. For example, take up tutoring if you’re gifted with math or language. If you’re crafty, try selling the things you make at local craft fairs or flea markets.

The information in this article is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.

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David Eastman
I was given $1,000 to invest in the stock market as a graduation present and have been hooked to the complexities surrounding today's market Recent College graduate with a degree in financial economics. Currently trying my hand in the marketing world. Strong interest in resources economics and sustainable management practices.

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