Financial experts generally advise against borrowing from – and especially withdrawing early – from retirement accounts. And for a good reason. The retirement account is a special financial vehicle designed to provide tax sheltering and asset growth free of taxes until the withdrawing period. The early withdrawal from the retirement account will affect your retirement, as is pointed out in the article “401k Employee Education – Never a Good Reason to Tap a 401(k) Plan Early”, to a degree is hard to imagine. For example, the effect of an early withdrawal can be illustrated with the following scenario:
A 30-year-old worker living in New York wants to cash out $14,000 from his 401(k). He’ll pay a 28 percent federal income tax based off his salary, a 10 percent early withdrawal penalty fee, and about 4 percent state tax. So of that $14,000 he wants to borrow from his retirement account, he’ll only net $8,575. If he were to leave it intact, and we assume an average 8 percent annual return, that would grow to over $150,000 by 65.
Of course, there are circumstances in life when the retirement account can serve as a much needed safety net but if there are any other options available like taking a personal loan or withdrawing from a ROTH IRA. These less hazardous options should be explored first. By giving such advice to your clients, they will benefit greatly in the long run and you will in turn earn additional credibility with them.