I Tapped My 401(k) Early — Here’s What I Wish I Knew First
If you’re short on funds to cover personal or business expenses, you might think about withdrawing what you need from your 401(k). Unfortunately, if you’re under age 59.5, pulling money out of your 401(k) can result in all sorts of negative consequences, including taxes and penalties.
Before you decide to tap your 401(k), here are some things to consider from three people who did it and regret it.
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Why I Tapped My 401(k) Early
Here’s what three different people said when asked why they tapped their 401(k) early.
He Needed To Cover Business Expenses ASAP
Payam Mark Shayani, founder and managing attorney for the Pacific Attorney Group said that he tapped his 401(k) early because he needed immediate funds to pay for expenses he hadn’t anticipated that were related to his business.
“I thought the best way to get the money needed to keep the firm running was to access my 401(k),” he said.
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His Failing Business Was Unable To Provide a Stable Salary
Franco Nidea, finance content creator at Growing Tendies said he chose to tap his 401(k) early because he was running a failing business that was not about to provide him with a stable salary.
“I was forced to tap my 401(k) and Rollover IRAs from a previous job in order to pay my living expenses,” he said. [I] felt like a failure, but it was the only option at the time.”
His Beginning Business Needed Additional Capital
Ariful Islam, CEO and finance expert for Sterlinx Global, said, “Sterlinx Global was launched at a time when I had to fall back on my 401(k) investment.”
The beginning stages of starting such a venture as this demands a lot of capital and even though there were other sources of financing that we could have explored, I ended up needing more resources for the success of the company,” he said. “Consequently, I considered my 401(k) as one approach to eliminating this financial gap.”
What I Wish I Would’ve Known Before Tapping My 401(k)
Here’s what each professional said they regret not knowing before withdrawing funds from their 401(k).
Loss of Future Matching Contributions
“My retirement savings were reduced when I took money out of my 401(k) and I lost out on future business matching contributions,” Shayani said.
Penalty and Income Taxes
“Since I was under 59.5 years old, I knew that I had to pay a 10% penalty and then pay income taxes on the funds I was receiving,” Nidea said. “But I wish I’d known how devastating the long-term financial impact would be.”
Lack of Growth
Islam said that the money that was taken from his 401(k) could have continued earning compound interest had he left it alone.
“This is a huge opportunity cost in terms of foregone potential growth,” he said. “It was not only my immediate financial situation that was affected but it also led to long-term results regarding what I had set aside for my retirement. You need to comprehend how this choice will affect your finances in the future when you retire.”
My Advice To Others
Here’s advice from each professional if you’re considering withdrawing funds from your 401(k) early.
Understand the Long-Term Consequences
“Not only does an early withdrawal lower your current balance, but you also lose the chance to receive future employer matching contributions, which can drastically reduce your retirement savings over time,” Shayani said.
Explore All Alternatives
Shayani also said you should seek alternative financial options that don’t risk your retirement savings. “Small business loans, personal savings or immediate cost reductions might provide the liquidity you need while maintaining the long-term benefits,” he said.
Nidea also said his advice would be to explore every other option first.
“I wish I had been more proactive in seeking help and exploring other avenues before resorting to my retirement funds,” he said. “It’s a decision that should be a last resort. And if you do tap it, make a concrete plan to rebuild your savings as quickly as possible. Your future self will thank you.”
Islam agreed when he said, “Explore other ways of raising funds before opting for a 401(k) withdrawal. Personal loans, business loans or alternative investment means could be looked into with lesser future consequences.”
Understand the Full Financial Implications
“Have an understanding of tax implications and penalties involved with early withdrawals from 401(k),” Islam said. “Talk to a financial adviser who can give you advice on how your current financial situation might change as a result of this decision.
“Tapping into your 401(k) early can be a lifeline in dire situations, but it’s crucial to weigh the immediate relief against the long-term cost to your retirement security,” he said. “Making an informed decision about your 401(k) can prevent future financial hardship and ensure you remain on track for a secure retirement.”
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