If you’re one of the many working adults that has suffered from a layoff and had trouble finding a new job during the recession, you may be looking for ways to bring in some extra cash to tide you over until you secure stable employment. Although you will likely receive unemployment benefits (provided you weren’t fired), these have a definite shelf life, and eventually you will find yourself sans funding. When this occurs you could take any part- or full-time job to make up for the loss, but if you can’t attain employment commensurate to your last position you may find yourself with significantly less money, meaning you will have to find a way to spend less.
For many, this unfortunate situation has led to the loss of a home, a devastating blow after losing employment. And some people would rather turn to their 401K or other retirement accounts to get an infusion of cash than risk losing their home and the lifestyle to which they have become accustomed. But there are several reasons why this is a terrible idea.
For starters, there could be severe penalties when you choose to borrow or withdraw funds from a 401K, Roth IRA, or other retirement account. If you withdraw the funds permanently, you will have to pay taxes on the money as though it were income (since you contributed pre-taxable dollars to the account in the first place). You will also have to pay an early-withdrawal penalty (if you’re under the age of retirement, generally considered to be 59½) and it could be as high as 10% of the funds you withdraw.
If your plan is one that offers loans (not all do), you are much better off going this route since it will alleviate the burden of paying taxes on the money, as well as the penalties of early withdrawal. But you will still have to pay an upfront fee, you will be limited in the percentage of funds you can borrow, and you will have a strict schedule of repayment that includes interest on the loan. Should you fail to repay as scheduled you may face serious financial penalties, including taxes and fees.
However, there is a much bigger reason that you shouldn’t touch your 401K: your future. If you borrow against your retirement accounts you may as well be trading your future stability for comforts today. If you are actually able to repay the loan in the time-frame given (generally five years, although it may be longer under certain circumstances), you may not lose much in the long run (aside from the build-up of compound interest, which could actually be fairly significant). But should you fail to repay your loan you will face not only taxation and other financial penalties; you will also forego that money in the future.
Now is the time to save money, while you are still young and able-bodied enough to work. If you have to make sacrifices now, at least you know you’ll be taken care of later on. So pawn your jewelry, sell your house, or look into cash loans; anything to avoid touching your 401K. You’ll be happy you did when you hit the age of retirement and you have the money to support yourself.