SOUTHFIELD, Mich. (WXYZ) — With finances tight, many are looking to their 401k for some help but there are a few things you need to consider first.
"I've been furloughed since March 24," said Larry Logan.
It’s been two months since Larry Logan went ‘off the clock’ of his automobile servicing job but while he says time has been moving slow.
"I've been having to dip into my actual savings but that now is starting to go low," said Logan.
His rainy day fund has been draining really fast.
Unemployment benefits are helping he says but isn't enough to cover the bills forcing him to weigh a decision he’s never had to weigh before.
"It’s starting to diminish so if that does happens, I’ll have to dip into the 401," said Logan.
At 56 years old, it’s the money he has pegged for retirement but for many across the country right now withdrawing from a 401k is more appealing than ever before.
"If you are under there of 59 1/2 , you have access up to $100,000 from your 401k," said Michael Foguth of Foguth Financial Group.
"Plus the 10% early withdrawal penalty has been eliminated," he added.
Financial advisor, Michael Foguth, says there are still some downsides to consider.
"People have to be prepared come next April, when it's tax filing time and you say, remember that 30,40,50 grand we took out in the summer of 2020, that tax bill is going to turn around and come due," said Foguth.
Paying the taxes could create another headache down the road, though under the new policy, instead of having one year to pay taxes, you’d have three. If you pay back the amount you took within period, you can claim a refund on the taxes.
That said, stocks have tumbled in recent months so it’s a less than stellar time to pull your money out of long term assets.
The money you pull out loses the benefit of compound interest, which could mean the difference of thousands of dollars.
If you absolutely need the money, take it and make it a goal to pay it back.
As for those wondering if they should still be contributing?
"The answer is absolutely! If you can afford to it's called dollar cost averaging." said Foguth. "You're buying at a lower price point than you were three months ago."
Here’s the Rebound Rundown:
- Cashing out your 401k is penalty free
- But taxes and loss of compound interest should be considered
- If you have to take the money out, make a plan to return it within three years
Before you pull money out from your 401k- consider talking to an accountant or financial advisor first.