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Emergency Fund vs. 401(k) – Where Not to Pull From

August 21, 2020

The number one goal in preparing for retirement is to accumulate wealth over time, and there are many tips and tricks to navigating your saving years that can maximize your money and minimize risk. One of these is to create an emergency fund to help pay for life’s unexpected events. Whether it’s a job loss, car or home repairs, or an emergency medical situation, these events can turn into financial pitfalls and throw your retirement plans off track.

Some clients have asked, “Why should I struggle to save extra cash when I have my retirement accounts to fall back on?” While it can be tempting to borrow against these already established accounts, the penalties that accompany an early withdrawal can have huge consequences and should be used only as a last resort. For example:

Contribution Halt - Some plans don’t allow you to make additional contributions until the loan is paid off, putting you further behind on your retirement goals with less time to make it up.

Costly Fees - While interest rates on these loans may be low, there are often additional fees, annual costs and more that can add up to a higher price tag.

Smaller Paycheck/Tax Benefits - Some retirement account loans are paid off directly through your paycheck, which hurts twice as badly because you’re now using post-tax money to pay off what had been pre-tax money.

Loan Defaults - Outstanding amounts get hit with income tax and usually incurs an additional 10% penalty.

Loss of Asset Protection - Money taken out of these accounts waives the protection it originally had against creditors in the event of a bankruptcy.

If you don’t yet have an emergency fund in place or aren’t sure if you have enough, let’s connect and discuss just how much you should set aside so we can keep your retirement accounts intact.