We Don’t Play With the 401k!
Consider this scenario- You need money immediately. Your life will improve somehow if you can pay for whatever it is it right now. You can finally pay off that credit card debt or you can finally pay off that school loan and move on with your life, but the only way you can pay, is to take the money out of your 401K. Here’s my advice- DO NOT DO IT! The 401k isn’t today money. It’s future money.
You’ve probably heard that taking money from your 401k isn’t a withdrawal “it’s a loan”- that your automatic payroll deductions pay it back and it won’t affect your cash flow. You heard a bad idea.
First Reason Why Taking Money from the 401k is a No-No:
Debt payments should affect your cash flow. Never to the point of punishment or denying you or your family your needs and wants, but it should be noticed, that way we learn that loans must be paid back. Hopefully, we learn how to avoid borrowing in the future. Namely by setting up that emergency fund.
Second Reason Why Taking Money from the 401k is a No-No:
Most 401k’s provide matching funds. Your employer matches your contribution to your account up to a certain level. Your payroll deduction is your “contribution” to the plan. Automatic payroll deductions that pay back loans are not “contributions” -those are loan payments. Loan Payments don’t get matching funds. 401k plan rules will vary-to understand how your plan’s “match” works speak to someone in HR and get referred to the plan administrator for your plan’s rules.
Third Reason Why Taking Money from the 401k is a No-No:
When your payroll deductions go to pay off your loan- you’re not saving for your retirement. The time it takes to pay back your loan is how long you’re going without adding to your savings. The 401k is for your retirement. The 401k isn’t today money. It’s future money.
Borrowing for a home purchase may have different rules, again discuss this with plan administrators to learn all the rules. Commonly these loans are paid back over 10-years instead of 5-years. Remember that means you’ll go for 10 years without contributing to your retirement. Experts say that this too should be avoided. Know all the rules of your plan before you do anything.
The only acceptable reason to borrow from your 401k is to pay back taxes or other money owed to the IRS, to pay a tax lien that would deny your family’s immediate needs. Hospitals and Doctors will work with you to set up payment plans - Always ask them about this.
We set up our Emergency Funds to pay for our Emergencies- we pay our debts off by making minimum required payments until the Emergency Fund has enough in it to cover 6 months of expenses. Then and only then do we double down on our debt re-payments.
The one predictable expense that you can’t borrow to pay for is your retirement. You can borrow for a car, borrow for a home, borrow for education. But you can’t borrow to pay for retirement. That’s why we say “We don’t play with the 401k!”