For most people their 401k retirement fund is so important to their future planning and well-being that they would never in a million years consider touching the money they have saved up in it. Nowadays though there are occasionally people who feel that the risk of taking money out of their 401K in particular circumstances is worth it for the potential rewards it might bring. This could be to fund the education needs of a son or daughter, although most often it is done when deciding to start up a new business. Clearly it is not a decision that should be taken lightly – bear in mind that you could potentially be ruining that comfortable retirement you had been saving for and you could come to rue your decision for the rest of your life. That said, there are rare occasions when it makes sense and if handled correctly, could be a shrewd financial move:
The first such occasion is obviously to provide funds for a new business. If you have an idea that you know is a sure fire winner and you cannot get funding anywhere else then it might be worth doing, but you need to be very sure about that idea! To get some short term start up funds at a time when the banks aren’t lending, many new businesses are having to think laterally and look to alternative sources closer to home, such as borrowing from friends and family, taking equity from their property or taking money out of their 401K.
Another scenario where it might make sense is if you are really struggling under a mass of high interest debts that you have built up and which are crippling you financially and making it difficult for you to rebuild. In such a scenario you may well find it is worth tapping your 401K for a loan so that you can borrow at a low interest rate to clear all those debts and be able to clear them a great deal quicker. It is important though that you only take out enough money to clear the debts and that you never do it again – this should only be done once and you should never allow those debts to get anywhere that level again. Not if you want a decent retirement!
Both these examples are of course emergencies and very rare. Where possible it is always better to explore all the other options that are available to you as there may well be an unturned stone out there of potential financing that means you don’t have to tap into your funds. And bear in mind too that although there are a number of circumstances when you are permitted to take out your funds from your 401K (such as starting that business or medical emergencies) most times if you wish to withdraw money from it you will be hit by large financial penalties or fees for that early withdrawal. Indeed the only way you can avoid those fees is by repaying the money back into the 401K within 60 days. Consequently for a short term cash flow problem for business or medical issues it is ok to do on a one off basis. Anything else and you risk taking a serious hit to your retirement savings. So don’t go hitting that 401K for a luxury holiday!
Esther is a financial journalist and writer. She enjoys covering everything from personal finance to small business tax advice and from mortgages to investments. She also writes a blog for a payday loans UK site.