Do you have a 401(k)? Do you even know if you have a 401(k)? If you have one, wouldn’t you want to dip into this little nest egg to pay down some outstanding debt?
There are some things you should know.
A 401(k) is a retirement savings plan. While some are set up through banks or investment firms, most Americans have a 401(k) established by their employer. A predetermined amount is withheld from each paycheck to be deposited tax free into the account. An employer may contribute to your 401(k) as a part of your compensation, with some employers matching whatever contributions that you’ve made. Most 401(k) plans allow you to accumulate these assets tax-free.
According to the U.S. Census Bureau, however, only 32% of Americans actually have a 401(k). And while younger people have around $4,000 saved, the average 401(k) balance is over $96,000. It seems like a great asset to have at your disposal but bear in mind that retirement is expensive. Between housing, food, and healthcare, how long would $4,000 last? How quickly would you go through $96,000?
When you consider borrowing from your 401(k), ask yourself one basic question: Can you repay it? Will you be able to replenish those funds? Will they be there when you need them later in life?
The IRS will allow you to borrow 50% of your vested interest in your 401(k), up to $50,000. If your balance is less than $10,000, then you may borrow up to $10,000. But individual plans may have rules in excess of the government, with fees and penalties that impact your ability to borrow your own money.
So, should you do it?
- What if you become unemployed and are no longer contributing to a 401(k)?
- While your 401(k) contributions are pre-tax, you would repay it with after-tax dollars. Depending upon your tax bracket, dipping into your 401(k) for $100 may cost you $125 to replenish.
And here’s the hidden nest egg about your nest egg:
Your 401(k) is a protected asset.
- If you find yourself in crushing debt due to unforeseen medical expenses, you may be sued for those monies. But they can’t touch your 401(k).
- A debtor may sue to garnish your wages to collect payment. But they can’t touch your 401(k).
- You may decide to declare personal bankruptcy to recover from debt. This would involve paying back certain debts and creditors. But it won’t touch your 401(k).
There are many things that you can do to recover from debt and still preserve your retirement funds. Give us a call and we can help you to explore the ways.