Articles - Archived Expert Advice

Using Retirement Funds

I recently lost my job. Rather than dip into my existing savings, why not use my former employer's 401(k) to cover monthly expenses for a few months until I find work?

When you leave a job, it's easy to look at retirement funds as a simple solution for paying bills. However, it's not likely the best solution. Cashing out your 401(k) can prove to be costly in several ways. First, when you take funds out of your retirement plan, they are subject to ordinary income taxes. If you're under 59½, you'll have to pay an additional 10 percent early withdrawal penalty, as well. Thus, if you're in the 15 percent income tax bracket and under the age of 59½, this strategy could end up costing you 25 percent!

Since you have savings, dip into it. That's why you have it. A good strategy is to keep three to six months of living expenses saved as an emergency fund for things like losing a job. Keep your retirement savings for retirement. You don't want to be caught without it when you need it later!

If you don't have enough savings to last—and you have no other source of money to borrow from to pay your bills—only then should you consider using retirement funds. But before you do, consult with your 401(k) administrator to see what rules and regulations they have on "borrowing" or "cashing out." Most 401(k) plans will allow you to borrow from your 401(k) account to pay medical bills, education-related expenses and other exceptional items. This may help you avoid unnecessary taxes and penalties.

Of course, LGFCU's financial planners are here to help with your retirement questions. Just call us at 877.367.5428, or email us at info@lgfcu.org.