Sometimes, things happen that make it so that you need to access money you have stored away. The hard part is when you don’t have enough in savings and when that happens, where do you get the money from? Here are some reasons why you should (or should not) tap into your retirement accounts early.
Covering an Emergency
One of the most stressful situations possible is not having enough money when an emergency comes. Whether it be due to a natural disaster, pandemic, natural disaster, or house fire, you will want to make sure that you have the funds to cover everything.
Because emergencies are something you can’t control or expect, there is no way to plan for how much money you would need or if you would ever be short. This is where tapping into your retirement account early comes into play. According to Mad Fientist, you can access money from your retirement account to help pay those unexpected costs. However, you should only use them if absolutely necessary and not take out more than you need.
Better Direct Funds
By tapping retirement funds, you can use that money to help you make more money in the future. An example of this is starting a business with money you already have, and in some cases with help from loan programs to make money directly from your new business.
You can access money for a small business, or for another use, through your 401(k). According to Franchise Gator, if you have $50,000 or more in a 401(k), it can make sense to take advantage of a Rollover for Business Startups (ROBS). ROBS helps you finance your business even if you wouldn’t normally qualify for a business loan.
Income Tax
Unless you need to tap into your account for an emergency or another absolutely necessary cost, you may want to just stay away from it. Not only will tapping into your account possibly affect return rate, but it could also mean that you pay more in income tax. Once you take money out, you could end up paying 25% or more of the withdrawal in income taxes, which may be a deal breaker for you.
While you typically shouldn’t touch your retirement fund at all, there are some reasons you might need to. Regardless of the situation around a possible withdrawal, think carefully about whether you want to deal with the drawbacks of using your account before you touch it.
Need help figuring out a financial plan for your life? Make an appointment to meet with Mike!
