IT’S NOT UNCOMMON TO FIND YOURSELF IN A SITUATION where you need access to cash fairly quickly. That’s the point at which many people consider taking money out of their employer-sponsored 401(k) plan accounts through either a loan or distribution. But before you make the decision to withdraw, consult with your financial advisor. An advisor can take your personal situation into account and work with you to find other options.

 

“It’s understandable that an individual that needs access to money may consider dipping into their 401(k) plan,” says Sylvie Feist, director and retirement management executive, Retirement & Personal Wealth Solutions at Bank of America. “In some circumstances, your 401(k) plan account may be or seem like your only choice for getting access to necessary cash.”

 

A lost opportunity to grow your savings

Here are some things to consider before you look at your 401(k) as a source for meeting your current need. As much as you may need the money now, by taking a distribution or borrowing from your retirement funds, you’re interrupting the potential for the funds in your 401(k) plan account to grow through tax-deferred compounding — and that could make it more difficult for you to reach your retirement goals, says Feist. Taking funds out of your plan account might mean missing out not only on the potential growth of the money you have invested but also on any growth of that money’s earnings.

 

 

What happens if you leave your job before the loan is paid off?

Although you generally have up to five years to repay loans from your 401(k) plan account, leaving your job (or losing it) before the loans are repaid may mean you have to pay the money back in full quickly. The amount that still needs to be repaid is now considered a distribution. You may be subject to federal and state income taxes, as well as an additional 10% federal income tax if you are under age 59½, unless an exception applies, Feist adds. However, you may avoid this tax treatment by repaying or rolling over the outstanding loan amount to a new employer’s 401(k) plan or an IRA, as long as this is done by the federal income tax filing deadline, including extensions, for the year in which the offset occurred.

 

For all of these reasons, says Feist, “before you consider taking a loan or a withdrawal from your 401(k), which may be your only retirement savings, make sure you’ve explored other options that could meet your needs. Your retirement savings should be your last resort.” By tapping into them, you could be impacting your future financial security. An action to consider, if you are able, is to set aside funds for short-term needs, in a separate account, so you have the money available — if and when you need it.