Cashing Out

One in four workers plan to tap into her retirement savings prematurely to cover current expenses, according to a recent study by HelloWallet.com.

If you’re laid off and dodging calls from creditors, it may be tempting to cash out your 401k.

But just like reaching for that doughnut when you’re on a diet, experts say it’s better to refrain. Here’s why:

Cecily Welch, CPA and senior tax manager at J Gorowitz Accounting & Tax Services says, “There is rarely a good reason to cash out a 401k.”

“Even if a person thinks they are in a big financial pinch, it’s nothing compared to being in a financial pinch at 70.”

She explains that with taxes and the penalty for early withdrawal, you’ll probably only reap 50 to 60 percent of the balance.

And if you’re planning to catch up later, you may want to reconsider.

There’s only so much you can put into a retirement plan, with the limitation defined each year. The maximum contribution allowed in 2013 is $17,500.

So, if you cash out a $50,000 balance, it would take at least three years to get back where you started – assuming you can afford to put the maximum contribution in each year.

Another incentive to leave your 401k just like it is: You don’t want to lose the tax deferred growth.

Try exploring other options first.

Are there expenses for wants you can reduce in favor of those for needs?

If you have strong credit, research loan and refinancing options since interest rates are still low.

After all, you want your Golden Years to be truly golden!

Bonus PINK Link: Are you ready for tomorrow?

By Christine Stoddard

Christine Stoddard is a writer and television producer. She owns the arts and communications firm, Quail Bell Press & Productions, LLC.

“I’ve been attending lots of seminars in my retirement. They’re called naps.” Merri Brownworth