I’m hoping that most of you reading this have that lovely 401(k) nest egg incubating somewhere in a coop of mutual funds, stocks, and bonds. Now, I know times have changed. A lot of y’all are entrepreneurs, successful ones, and are like, “Uhh, what 401(k)?” Well, I’m talking to y’all, too, and especially those of you who left that corporate job and are on your way to being on your own. Don’t worry, I got you.
I’ve had many a friend tell me how they had to tap that 401(k) for reasons such as making additions to a home, or for emergency situations like funerals, or to start a new business. These reasons are all valid, but is it ever a good idea to tap that asssset account?
In 2018, employees will now be able to contribute up to $18,500 annually to their retirement account. That’s great news, and for those that elect to do this, you’ll start to have a nice chunk of change growing for your retirement days. For those who are self-employed, you may qualify for a Solo 401(k), or you can talk to a former employer about keeping funds with them, or you can simply open an IRA. But that money you’ve saved might start to look reeaaaal good. You might start salivating about how you want to have it now or how you need it for one of the reasons I mentioned above … but hold on, lovelies! Have you thought about the fact that if you take a loan from your 401(k) you’re susceptible to:
- Being taxed twice on that dough. When you take your money out, you’ve got 90 days to put those dollars back in the bank. If you do, great (sorta), because you won’t get a penalty tax. But, you will be using after-tax dollars to pay off the interest on the loan. If you don’t get that money back in within the 90 days, it becomes a distribution which gets that lovely penalty tax (unless you’re over 59 1/2) and then an income tax, potentially. Yes, you have those three months to put this sweet cash back into your account, but if you’re like most people, ain’t none of that money making it back to that nest egg. #Taxed
- Having no dough to roll. When you take your money out of your 401(k), it doesn’t take a math genius to know that now there is less money that can compound to make you more money! That’s not fun. So, if you can, like NOT touch this money, it is better all around.
I know emergencies come up. I know people get laid off and use that as a jump off for a new business. Keeping it real, I’ve tapped into mine on more than one occasion. I know that y’all need to find the money for these life changes from somewhere. Do what you can to take a bank loan or borrow from a friend or trusted individual. This is no time to be modest, embarrassed, or emotional about money; because aside from having no money in the account, if you don’t handle this money properly, you can end up with huge tax issues that will make everyday living tough, let alone retirement. You need to sit down, look at the facts and figures, and make smart decisions that don’t have you treating your retirement fund like an ATM. (Oy vey, if only someone had shared this with me when I was in my 30s. You can thank me later!)