5 Tips to Plug Leaks Draining Your 401(k)

A little TLC can result in thousands of extra dollars down the road

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Don’t Cash Out Lightly

piggy bank iou 300x207 5 Tips to Plug Leaks Draining Your 401(k)The hard reality of the current economic environment is that many people have had to tap into their retirement savings to make ends meet. But this should be an absolute last resort.

For starters, if you withdraw money before retirement, it not only will be taxed, but you’ll absorb a 10% early-withdrawal penalty. So all that hard work you put in to save will be offset by steep charges simply for taking that money out early.

Also, it’s not just a question of simple math. Removing $10,000 now cuts much more than $10,000 out of your total nest egg. A 5% average return annually will turn that $10,000 into over $16,000 in just 10 years. Presuming your 401k performance is good, you are forfeiting the potential profits you’ll generate with this investment in addition to the principle.

Never take a loan from your 401k plan or cash out early if it can at all be avoided. Depending on your circumstances, it actually might make more sense to put a few thousand bucks on a credit card or take out a home equity loan than to eat into your nest egg.

So think things through before raiding your retirement. The penalties are steep.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.


Article printed from InvestorPlace Media, http://investorplace.com/2012/06/5-tips-to-plug-leaks-draining-your-401k/.

©2014 InvestorPlace Media, LLC

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