Are you thinking about cashing out some of your retirement income? It may seem like the best solution to current financial trouble. There are many consequences to consider with choosing this option. Most 401K plans will allow employees to borrow against their retirement and pay it back over 5 years with interest. This is the best option if you truly need to borrow against your savings as long as you pay it back within the 5 years.
How Much Will It Cost Me?
There could be trouble along the way if you get laid off from your current job. If you do become unemployed and you need to repay your retirement loan, you are usually only allowed 60 days from the time your employment ended to replenish any funds to your retirement account. If you do not meet that deadline then your loan turns in to a distribution. Then you will have to pay taxes on it as well as a possible 10% penalty. So you have not only decreased your retirement savings you may now end up with a pretty significant tax bill.
Hardship Distributions
The hardship distribution is for emergency financial situations. You may be able to take one of these distributions if you need to pay for funeral arrangements or if your home is under foreclosure. You will still be responsible for any tax and penalties from this type of distribution. So if you are currently experiencing financial hardship we suggest receiving some type of tax advice to make sure you are making the best decision for your situation.
TurboTax Online offers free tax help and advice. Please visit TurboTax Online to find out more about cashing out your 401K.
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