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Withdrawing from retirement is risky

September 26, 2008 12:00:00 AM PDT
As the economy gets worse there is a dangerous new trend as workers begin to withdraw from their 401(k) plans. Whether you are closing out the accounts or borrowing, it is putting your retirement at risk.Debbie Kraft lost her job recently. She has a little cash to get by, but is worried that it may take too long to find the next job and she'll have to dig into her retirement funds.

"I have three months at least for mortgage, car payment, insurance, regular bills. But, if that runs out, and I don't get fulltime employment, then that's something that I may have to utilize," said Kraft.

Though she has worked many jobs over the years, Debbie has rolled over her retirement savings each time. But experts say many job-changers go a different route. A recent online survey found 40 percent of 20 to 30 year old workers cash out their 401(k) plans when they leave a job. And many others are drawing on their funds to survive this economy. Either way, that's a retirement disaster.

"In the short term, you pay a 10 percent early withdrawal penalty, plus taxes. And, for many consumers, that means you're probably getting 60 or 70 cents on the dollar for what you had in the 401(k). And, you've dealt a permanent setback to your future financial security by robbing that retirement plan," said Greg McBride, a financial analyst for Bankrate.com.

McBride says even borrowing against your 401(k) to help pay down debt can be a bad idea unless it's an absolute emergency.

"A lot of people may think this is a good idea because you're paying the interest to yourself. But, don't discount the fact that if you lose your job, you have to repay that often within a very short period of time ... up to 90 days. Otherwise, it's treated as a distribution," said McBride.

A distribution is taxable and may incur a 10 percent penalty. Debbie agrees planning ahead is the way to weather the tough times.

"That's why it's so good to, when you do have a job, to invest when you can," said Kraft.

Withdrawing from your 401(k) takes planning and a strategy in place, so seeking professional help can make a big difference.

 

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