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Consider Your Options Before Raiding Your 401(k)

One of the ways that people try to get out of serious debt is to take money from their 401(k) - their retirement fund. On the surface it seems to be a good idea - the money is there in the account, it's your money, and it would help alleviate immediate financial problems.

Record numbers of Americans have thought just this, with reports showing one in five employees borrowed from their 401(k) in 2009, and the number is continuing to grow.

If you are one of the many Americans considering borrowing against your retirement nest egg, take some time to think about if it is truly in your best interest. You should make sure to examine all your options and consider your financial big picture.

Even if you are planning to pay the money back, you are still taking a big financial risk. For instance, if you get laid off the loan against your retirement fund will generally have to be repaid quickly, even though you no longer have a steady income. If you fail to pay back a loan against your 401(k) it becomes a withdrawal, and the government considers it taxable income and also assesses a 10 percent penalty for withdrawing before the age of retirement.

If you are drowning in debt, consider filing for bankruptcy as an alternate solution to raiding your retirement fund. Bankruptcy can help you dig out from debt, avoid home foreclosure and give you a fresh financial start. Retirement funds are also protected from creditors. Once you take money out of your 401(k), however, then it is more vulnerable.

So think about your options before you decide to take funds from your 401(k) - bankruptcy might be a better solution for your situation.

Source: Kansas City Star, Workers Increasingly Raid 401(k)s for Short-Term Cash, Mark Davis, 25 July 2011

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