Bad move: Pulling retirement money to pay bills in a pinch
Finance gurus are attributing the hardship withdrawals to bad credit markets and increasing costs of living. They say that employees are dipping into their retirement funds early to make mortgage payments and avoid filing bankruptcy.
But using retirement funds before you reach retirement age comes with a big price. While the law in the U.S. is set up to allow access to the funds in certain situations, in many cases, the withdrawal will be subject to interest and penalties.
On average, taxpayers can lose about 50% of their withdrawal to federal and state taxes and penalties. So if someone withdraws $20,000 to catch up on a mortgage and other bills, they can expect to take a hit of around $10,000 on that money when tax time rolls around.
For this reason, consumers should only do a hardship withdrawal if they are in dire need of the funds. Otherwise, I recommend stopping all new contributions to retirement funds, and using the money that would have gone into your 401(k) to help ease your financial burden.
Forensic accountant Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations through her company, Sequence Inc. Forensic Accounting. The Association of Certified Fraud Examiners honored Tracy as the 2007 winner of the prestigious Hubbard Award and her first book, Essentials of Corporate Fraud, will be on bookshelves in March 2008.