Thinking Of Raiding Your 401K? Thinking of raiding your 401k to pay this month's bills? Our personal finance contributor examines the pros and cons of taking money out of one's retirement account to cover living costs.
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Thinking Of Raiding Your 401K?

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Thinking Of Raiding Your 401K?

Thinking Of Raiding Your 401K?

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ALEX COHEN, host:

With the collapse of Lehman Brothers, a lot of people on Wall Street are now out of work. They join the ranks of plenty of other Americans who are struggling with hard times.

MADELEINE BRAND, host:

Your credit card bills are looming, your car loan is overdue, you're behind on your mortgage, you have no emergency fund. Aargh! What to do? Well, increasingly, people are tapping into their tax-deferred retirement funds, or 401Ks, to help bail themselves out of a financial jam. Is this a good idea? Here to talk about this trend is Day to Day's personal finance contributor, Michelle Singletary. Hi, Michelle.

MICHELLE SINGLETARY: Hi.

BRAND: Well, I know you're going to say yes to this question, is raiding your 401K a bad idea? But what if people have no other option?

SINGLETARY: Well, you know, I would say don't do it if you absolutely can tap some other sources. But, honestly, I've actually helped people recently to do this because there just was nothing left anywhere, and they were about to be evicted. There's no food. They've got to make a car payment. Because what happens is more and more Americans are relying on their retirement fund for retirement, and even a withdrawal of 5,000 dollars can erode your retirement plan significantly.

BRAND: What if you're faced with this choice, borrow more on your credit card or tap into your 401K?

SINGLETARY: That's an interesting way to put it. I would say do neither.

(Soundbite of laughter)

SINGLETARY: I mean, honestly, you know, think about some other ways than borrow funds or taking it from your 401K. And I have to add, there are strict rules in terms of when you can tap your 401K. There's hardship withdrawal, and that would include eviction, to pay medical bills, and then you can also take a loan out on your 401K. If you don't want to do your credit card and you're between a hardship withdrawal and a loan from your 401K, and you think your job is fairly secure, go for the loan because at least you're paying back into your own account.

And please be mindful, many people do not realize this, under hardship withdrawal, you still have to pay taxes on that money, and you still have to pay a penalty. So let's say you're going to take out five or 10 thousand dollars, thinking that's going to help get you out of the hole. You're not going to actually realize that full amount of money because you've got to pay anywhere from 35 to 45 percent when you count in federal taxes, state and local taxes, and the 10 percent penalty.

BRAND: And if you take out that money or take out a substantial portion of your 401K, do you lose all the interest that you've accrued?

SINGLETARY: You don't lose the interest you've accrued, but you certainly lose the potential interest had you let that money stay in there and the compounding effect.

BRAND: Now, Michelle, I know you're not an investment expert, nor do you give investment advice, but what about people who aren't faced with such dire circumstances and are thinking, maybe I shouldn't invest as much these days, right now, into my 401K?

SINGLETARY: I would say don't do that. You should invest, sort of, without listening to all the craziness that's going on right now because it will scare you. But look at it as a sale. There are a lot of good buys now in the stock market, so you would be buying it at less. And if you invest every month, you're not spending as much money when things are high, and you get a bargain when things are low, like now. You should have an overall investment plan, and then invest according to that, not what you hear in the market. If you consistently invest and save, that's the other part, you will be OK.

BRAND: All right, ending on an up note. And if you have a personal finance question for Michelle Singletary, you can write to her at our website. Go to npr.org/daytoday, click on the Contact Us link, and put Michelle in the subject line. She writes The Color of Money column for the Washington Post, and she is Day to Day's personal finance contributor. Thanks, Michelle.

SINGLETARY: You're welcome.

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