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Jim Lentini: Resisting the urge to use retirement funds

Posted: October 19, 2009 10:07 p.m.
Updated: October 20, 2009 4:55 a.m.
When economic hard times cause sticking to a budget system that just isn't enough to make ends meet, there is a real temptation to tap into other long-term savings like your retirement savings account.

Sure, your account balance may have fallen during the last year, but it may still be the account with the largest balance in your savings portfolio.

Most experts believe pulling money from your retirement savings account should be viewed as an absolute last resort.

Here are four arguments against tapping into your account:

1. Early distributions result in taxes and penalties. Retirement accounts have specific rules designed to ensure they are used for their intended purpose. If you make any withdrawals when you are under age 59 and a half, you will generally pay taxes and an IRS penalty that further reduces your available funds. Why let Uncle Sam have any more than he's entitled to?

2. Loans have limits. Some job-related retirement savings plans offer a loan provision where you can borrow against a certain maximum balance in the account. However, many of these loans have five-year terms where the loan must be paid in full. And, if you leave your job for any reason during the loan period, in most cases you must pay the loan in full or it becomes a taxable distribution.

3. Your retirement money. Using these funds for any other reason defeats its original purpose: Building resources on which you can live when you are no longer working. Undermining the original goal may mean you need to work additional years, or it could lead to a retirement that is less comfortable than you had planned. Remember, it's you at work or your money at work.

4. Borrowed money isn't working for you. Any money you pull from your retirement savings account doesn't have a chance to earn interest or fund growth. This is a long-term savings vehicle. Slow and steady is the name of the game.

While it is easy to view your retirement nest egg as a means to cover current living expenses or pay off other debt, resisting this urge will usually prove to be the prudent course and in your long-term interest and sound financial planning. Always consult with your financial advisor to discuss alternate options to invading your long-term retirement plans.

Jim Lentini,CLU,ChFC,IAR is President of Lentini Insurance & Investments, Inc. His column reflects his own views and not necessarily those of The Signal.


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