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I Need Money! Should I Cash Out My Retirement Plan?

Written on July 21, 2008 by admin in Money

frustration The financial news seems to be all gloom and doom these days. The reports are that we’re not in a recession, but times are tough for a lot of people.

No matter how tight things get, we still have bills to pay. People are responding to this very intelligently. They’re turning to public transportation, eating out less, seeking cheaper forms of entertainment, and cutting back on unneeded items.

But what do you do if that isn’t enough?

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Tapping your retirement plan …

It’s tempting to pull money out of your retirement plan, like a 401(k), especially if you change jobs. In fact, about 40 percent of job changers in their twenties and thirties have done just that, according to a recent report by the Financial Industry Regulatory Authority (FINRA).

… could cost you $130,000 …

If you’re under 59½, it’s usually not a good idea to cash out your retirement plan. Let’s look at the example that FINRA used:

You’re 30-years old with $20,000 in your 401(k). If you earn just 6% on that money until you retire at 62, you’ll have nearly $130,000 in your account, without making any additional contributions.

… and then some!

Of course, you can start over. But you lose the power of money compounding on top of money on top of more money, all accumulating tax free until you take it out. So it’s like taking at least two steps backward.

But that’s not all. Here are 4 other steps back:

You’ll have to pay income taxes out of this money, since it was invested pre-tax.

There’s also a 10 percent penalty for early withdrawal (unless you’re over 59½)

Your employer is required to withhold 20 percent toward income taxes.

If you owe money, your creditors can’t touch your 401(k) unless you cash it out.

By the time you get a check, that $20,000 will probably be more like $14,000 net of everything. So cashing out of your retirement plan is a short-term solution with long-term consequences.

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Don’t Make This Costly Mistake

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How to Have the Discipline to Invest Even if You Don’t Have the Discipline to Invest

Written on May 1, 2008 by George Krueger & Mary-Lynn Foster in Bigg Solutions, Challenge, Financial Freedom, Money, Passive Income

Bigg Challenge
We recently discussed how to turn your $2,300 refund check into over $723,000. Well, that prompted a question from Stan. He says he’d love to take our advice but he knows that, if he got extra money in his paycheck, he wouldn’t be disciplined enough to invest it. His bigg challenge to us – is there anything he can do to make sure he does invest it?

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Bigg Advice
Here’s some good news, Stan … the secret is that you don’t have to have the discipline to invest. You just have to have enough discipline to set it up so you automatically invest. The best way to invest money is to do it before you see it.

Your retirement plan
The way you do that is to invest more in your employer’s retirement plan, such as a 401(k) or 403(b). Max that out first, before you consider any other alternatives.

You won’t see the money at all, so you won’t miss it. This money also comes out pre-tax, so you’re investing it without paying any taxes on it for now.

You’re not getting away with something; you will have to pay taxes when you take the money out. However, you won’t be working anymore, so it’s likely that you’ll be in a lower tax bracket.

When your retirement portfolio really starts growing, consult with a certified financial planner to make sure that a pre-tax investment is still your best bet. But while your nest egg is relatively small, it’s probably not a concern.

Automatically invest
What if you still have extra money after you’ve invested the maximum allowed in your retirement plan? Then make sure your paycheck is direct deposited and set up an automatic deduction from your bank account into an investment account.

A lot of us think nothing of having payments (e.g. mortgage or car loan) and bills (e.g. cell phone, utilities, cable) automatically deducted from our bank accounts. But for some reason, we hesitate to set up the most important payment of all – the one to ourselves for our future!

So you see, Stan, lack of self-discipline isn’t really a problem at all. Thanks for sharing your bigg challenge.

Our bigg quote today is by an unknown author.

“Life at any time can become difficult: life at any time can
become easy. It all depends upon how one adjusts oneself to life.”

So take it easy … and make it easy … to retire on easy street.