I was able to use my retirement accounts throughout the years without owing taxes or penalties. A lot of experts treat retirement accounts as golden nest eggs that must remain untouched until age 55 or older. However, I tapped my retirement account in my 30s for different purposes. In many cases, I came out financially ahead by taking advantage of the money I had put aside for retirement. I looked at it as "re-purposing" my retirement money for more important priorities. According to a recent article by U.S. News & World Report, people need to think about the perils of using a retirement account for college costs. For me, it's about tapping retirement accounts the right way.
Borrowing from a 401(k)
According to the article, 7 percent of families this year took money or initiated a loan from a retirement account to pay for tuition. People took out an average of $3,256, according to a Sallie Mae survey. I borrowed about $4,000 from my 401(k) for one semester when I was short on the money needed to pay for my son's dormitory. I came out ahead because I took out the money when the stock market was high. As I paid back the loan payment each month, I was able to buy cheap shares of the mutual funds since the market had tanked. I know things could have worked out the opposite way, but it paid to take out a loan during a bull market.
Taking money from a Roth IRA
I have never withdrawn money from my 401(k) because of the tax penalties and taxes. However, I don't owe any money if I take out the money I put into a Roth IRA. I just can't touch the money that has been earned in the account. According to the Sallie Mae survey, 5 percent of families withdrew an average of $2,710 from their retirement savings. I view my Roth IRA as a backup emergency account. The key for me has been to make sure I keep at least half of the money in my Roth IRA in a money market account so I don't have to worry about selling stocks when they are down.
Assessing the situation
Before tapping my retirement accounts, I always assess the situation to determine whether it's the best strategy. I have a solid plan on how to pay back the money I took out. I decided to tap my retirement accounts to buy a home in my 30s because the real estate market was headed higher. I used a 401(k) loan to buy a car when the interest rates on car loans were high. In each case, I continued to contribute the usual amount to my 401(k) while also paying back the loans.
I am still on track to have $1 million saved for my retirement by the time I'm 66. I have another 25 years before I retire. I'm hoping I won't need to dip into my retirement savings, but I'll do it if it's the best option. I rather take a loan from myself than a loan from a bank.
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