When someone reaches the point that they are cashing out their 401(k), they will likely think it’s for a good reason. Medical bills, student loans, down payments and accumulated debt are all among the situations where it’s tempting to pull from your existing funds.
While many people use their 401(k) as a quick fix, it’s possible that they are also refusing to address the foundation of the problems that put them in the bad situation in the first place. This can lead to someone ending up right back where they started, but with no 401(k) to fall back on.
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The 401(k) is money to sustain individuals and couples as they age so they don’t have to keep working into retirement. It’s also harder to save that kind of money again after cashing it out than it is to fix whatever reason you want to cash it out for. As money expert Dave Ramsey’s website, Ramsey Solutions, put it, “Even a small cash-out can have a huge impact on your retirement savings.”
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Losing Your Job
Losing your job might seem like a justifiable reason to cash out your 401(k), especially if you need to stay afloat while taking the time to find another job. In this scenario, the individual still needs to pay taxes and also a 10% penalty for early withdrawal. Ramsey Solutions recommends rolling your 401(k) into an IRA when you lose your job just so the money can keep growing.
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Funding Education
Cashing out your 401(k) can significantly reduce the number of years and interests you have to spend on student loans. Or some people consider taking a loan against their 401(k) to pay college fees. But just because you can do this doesn’t mean you should. If you take a 401(k) loan, you still have to pay the loan amount and interest all within the due date.
According to the Ramsey Solutions article, “Your retirement savings come first before college funding for you or your kids. And when it comes to school, you have options.”
Making a Large Purchase
Ramsey Solutions found out that people who cash out their 401(k) to make large purchases like home renovations, weddings or a down payment on a house often regret it later. The simple reason being that it wasn’t worth it to lose retirement savings.