We all have different reasons for saving for retirement. Some of us want to travel the world. Some of us want to have a healthy cushion when we retire and don’t have to worry about financial surprises.
It has become easier for many of us to dip into our retirement accounts today because of so many financial challenges we face.
I fully understand when people say that they need to live right now and retirement is way out there. They say they need to pay their bills and pay off their debts to survive.
My wife and I were tempted to dip into our retirement funds when we were paying off our $40K debt. Gladly, we stuck with our plan of not using our retirement funds. We’re so happy we did.
In a recent survey conducted by GoBankingRates, 44% of the Americans or a majority of them dip into their retirement accounts to pay their bills or pay off their debt.
How Not To Tap Into Your Retirement Funds Early
If you think about it, it makes sense to take money from one account (i.e., your retirement account) to pay off your bills or debts. That said, there are other ways you can do to satisfy your financial responsibilities without dipping into your retirement accounts. Here are they:
1. Take out a personal loan.
It may not sound like a sound financial decision, but it is.
Personal loans typically offer as low as 4.99% APR (i.e., interest rate). Consolidating all your debts – typically have 17.99% – means lowering your interest payments and/or penalties.
That exactly what my wife and I did. We took a loan from Upstart with a rate of 5.99% and paid off all our $40K debt. In 2.5 years, we paid off our personal loan.
There’s benefit to using personal loans than getting money from your retirement funds. By doing it this way, you are avoiding the taxes and penalties associated with IRA or 401k withdrawals.
Best yet, you can pay off the loan with a fixed monthly payment at an agreed amount and loan length that work for you.
2. Get a better bank.
We all have our share of complaints with banks not giving us a better interest rate and charging us for even the most ridiculous reasons (not to mention the customer service sucks, sometimes).
We get mad or upset many times. If this is you, choose another bank where you’ll get almost everything for FREE and get a higher interest rate on savings.
I am a fan of CIT Bank – a bank that offers almost FREE for everything and a 1.55% interest rate on savings account, which is 25 times higher than the national average.
Your money will go a long way than what your current bank pays you.
While you won’t become rich, the money you earn on interest could help you pay for your bills or pay off some debts and you won’t need to worry about dipping into your retirement funds.
Plus, because CIT Bank doesn’t charge you for something that other banks do, you free up more money that you can use to pay for your other financial responsibilities.
3. Negotiate with creditors.
The last thing creditors like is for you to file bankruptcy – they get nothing.
Ask your creditors if you can make a payment arrangement, reduce or eliminate the interest charges, among others. Tell them that you are ok with going into a payment plan so you can pay off your debt.
The same idea goes with paying bills. Ask your bill collectors if you can make an arrangement or if there’s a way to reduce your bill. Instead of a 5GB phone data plan, how about a 2GB plan? How about dropping your cable subscription for a Hulu subscription?
If you aren’t into a negotiation, you can also try Trim – a personal finance app that will negotiate your bill on your behalf.
Remember, small dollar amounts, when combined, can make a big difference.
Why taking out money from retirement funds is so popular?
It is so popular because there’s no qualification to take money out of your 401k. You can easily get your money and the interest rate is so dirt cheap (around 4% to 5%).
Most plans will allow you to borrow 50% of your balance up to $50,000. You must then pay it back with interest through automatic payroll deductions. The loan, typically, is to be repaid within 5 years.
When should you use your retirement funds?
That question is worth thousands of dollars. The best answer is in retirement.
Retirement accounts are structured differently than any other investment vehicles.
They are structured in a way that it helps you avoid paying taxes on your earnings now. If you do pull it or some of it before age 59 and a half, the IRS will penalize you.
Early withdrawals are taxed as normal income plus 10% penalty on top of that. Depending on your tax bracket, you might see a big jump in your overall tax bill when you take out your money before age 59 and a half.
It is understandable to take money out from your retirement accounts during emergency situations and other unforeseen events. Sometimes, doing that may be the best option. After all, it’s your money.
That said, there are other alternatives, one of which is taking out a personal loan, to meet your current needs. Better yet, start now with a good, realistic budget that you can follow to a tee.
What if you really need to raid your retirement accounts?
Even after a lot of explanations you find yourself needing to raid your retirement accounts, here are some things you can consider:
What kind of debt is it?: The only time you should get money out of your accounts is when you need to pay loans such as payday loans that have sky-high interest rates. You wouldn’t want to pay debts with lower interest rates such as student loans or mortgage.
Do you have other options?: This goes back to the ideas presented above. You can always take a personal loan like Upstart, which has near-zero interest rates. You can also get a credit card like Citi and Capital One QuickSilver – both have 0% introductory fees and interest rates. If you are sure you can pay off your bill within a year, these credit cards may be your solution.
Do you have a plan?: Your retirement money is your safety net when you retire not now. Ask yourself if you have a plan to avoid getting into this bad financial situation again. Create a working budget and follow it to a tee.
Before you even dip your fingers in your 401k or other retirement funds, think how much money you will lose by doing this.
Alternatively, you can also think of ways you can pay for your bills and debts without taking a loan from your 401k. These alternatives including getting a personal loan, using a better bank, and negotiating your bills/debts.
Are you thinking of taking a loan out of your retirement accounts? Do you think that there’s always a better way to pay off your debts and bills than taking out a loan?