People tend to raid their 401(k) retirement accounts in times of hardship or before the purchase of big-ticket items, according to a recent study by Reuters. But local financial experts say that is not a good thing to do
"We work hard to keep people from doing it. It is a terrible idea," said J. Martin Kooman, president and CEO of Kooman & Associates Inc., Altoona.
One reason not to take money out is because there is a 10 percent penalty for early withdrawal - withdrawal before the age of 59. Once a person hits 59, the IRS allows withdrawals from a 401(k) without a penalty.
(Mirror photo by Gary M. Baranec)
From left, Brenda Wideman, CEO of Arrow Land Solutions, and financial advisers Chris Fusco and Terry Riley discuss the 401(k) plan Wideman has in place for her employees on Wednesday at the Fusco Riley Reismeier Financial Group LLC office at 1130 12th Ave., Suite 101, Altoona.
For those younger than that who take out $10,000, they have to pay a $1,000 penalty, plus they pay taxes on the full $10,000, said Chris Fusco, partner at Fusco Riley Reismeier Financial Group LLC, Altoona.
Local advisers suggest looking at all other options before taking money out of a 401(k) plan.
"I would look at every alternative possible to take care of your needs before withdrawing from your 401(k).What most people do is say they will put it back, but that almost never happens. That is the big problem," said Michael D. Wall, president/owner of Wall Financial Group Inc., Altoona.
Some 401(k) plans allow clients to take out loans on the money in their plan. That also may not be such a great idea.
Terri Johnson, a certified public accountant at Peterson Accounting Group, Duncansville, said people who do that are not hit with a 10 percent penalty.
"The problem is if [the clients] leave their job, they have to pay the loan back right away. If you don't have the funds, it becomes taxable and you are charged the 10 percent penalty. It becomes considered an early distribution," Johnson said.
Rather than take a 401(k) loan, she suggests looking at other avenues, such as a line of credit on your house.
There are situations where people can make a withdrawal in hardship situations, thanks to provisions passed by Congress.
Some of those situations include unreimbursed medical expenses for the individual, his or her spouse or dependents, payment of college tuition and related educational costs and purchase of a principal residence.
People also may qualify to take a penalty-free withdrawal if they become totally disabled, are in debt for medical expenses that exceed 7.5 percent of their adjusted gross income or if they are required by court order to give the money to their divorced spouse, a child or a dependent.
Even those who are granted a waiver to the early withdrawal penalty must pay tax on the money withdrawn.
To keep a retirement nest egg growing, Eric Irwin, co-owner of Irwin Financial Inc., Altoona, said people should contribute as much to their plan as possible, especially if their employer provides a match.
"I have a client who puts in 6 percent of his pay and gets a 3 percent match. He gets 50 cents on the dollar and that is free money," Irwin said. "Be aggressive with your money if you are young. Contribute up to the extent you can to get the match. People should put in the most they are allowed or what they can afford to put in."
In addition, Fusco said it is important to pay attention to the market. When the market is not doing well, some people stop their contributions. But that might not be the best approach.
"When the market is down, $100 buys more shares than what it does when the market is up. When the market goes back up, you end up with more shares than you would have," Fusco said. "We need to educate, educate and educate the people and companies we deal with."
Mirror Staff Writer Walt Frank is at 946-7467.