Should I Withdraw From My 401(k) to Pay Off A $50k HELOC?
I am a huge advocate and proponent of employer retirement plans such as a 401(k), 403(b), 457 deferred compensation plans, IRAs, etc. Since most corporations in America have done away with providing Pensions for employees when they retire, a 401(k) - for example has become the new way of paying into and securing a future Pension for that employee.
But the two biggest challenges for most employees today who has these types of employer retirement accounts is that they are now responsible for: deciding on actually how much to contribute to their plan and which investment options they wish to choose amongst the plans funds. My God, that's a precarious position to be put in! And to top it all off, not only are employees fully responsible for their decisions as to how much one should contribute monthly and which funds to invest in, but they have to do these things without any assistance from a financial representative. That's totally brutal!
Now, aren't we suppose to be talking about the possibility of withdrawing funds from a 401(k)? Not the challenges of a 401(k)?Yes and Yes - okay here we go. I had a client's sister ask, should she withdraw $50,000 from her 401(k) to cover a HELOC debt obligation? And my answer was a quick, unequivocal, absolutely no to that question. Why? Because (remember) your 401(k) is now your new Pension account. Would you like to have a nice, comfortable monthly income when you retire or some measly amount? Of course, you want as much as you can get. Like past Pension payouts, a Pension was determined by the number of years you'd worked and what you made. The way that system was structured, you weren't allowed to borrow or sabotage it. It was off limits until you retired. So, that's why I told her no in this case. She needed to look at other options.
One of the last things that Americans need to do when money gets tight is to withdraw funds from their employer retirement plan. That's why establishing an emergency account early on is ideal. However, there are exceptions and one occasion would be if someone had loss their job or if there were no other liquid cash available. You have no choice in this matter and you have to eat!
In conclusion, whenever you're in a position and have to borrow money, be sure to set up a plan where you can pay it back. The worse thing you can do is put yourself in a financial hole and not able to handle the payments. Why do it in the first place if you know you won't be able to handle it? We at times look for the easy way out but it seldom is. Just have your plan and funds set aside before you even ask for a loan. As I said to my client's sister, it isn't a good idea to take funds from your 401(k) at work to cover a $50,000 HELOC. It is like stealing money from your retirement Pension account and knowingly diminishing your future lifestyle.