As the inflation crisis continues, more Americans are turning to their 401Ks for help making ends meet.
“Some are not only taking it out of their savings, but they are also taking it out of their long-term retirement,” Dominic Calavro, the president and CEO of Florida Tax Watch, said. “Which is shortsighted, but very, very troubling.”
Melissa Gannon is the manager of financial planning at Castle Wealth Management in West Palm Beach. She says they often encourage clients to borrow against their 401K instead of withdrawing from it when possible.
“A lot of plans allow you to borrow from it,” she said. “So, they will let you take out the max of $50,000, so you can take that amount out of it, and you’re borrowing against it.”
Gannon explained when someone is younger than 59, and a half, a 10% penalty has to be paid on top of any income taxes when money is withdrawn from a 401K.
“It’s an expensive way to get at your savings, is really the bottom line,” she said.
Gannon suggested anyone considering a withdrawal from their 401K reach out to the plan’s administrator first.
“I just always encourage people to get informed before you start withdrawing.”
She also suggests looking into the Secure Act, which allows people to take $1,000 from their 401K account without paying the 10% penalty.
Gannon said the plan administrator will know if you can borrow against it or if you are eligible for any Coronavirus, disability or hardship-related exemptions.