First Person: Resisting the Temptation to Raid My 401(k)

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Throughout the years, I've been tempted to raid my 401(k) as an impulsive but not too smart way to solve a financial dilemma. According to a new study by HelloWallet, one in four people who participate in a 401(k) plan give into the temptation to use their account for non-retirement expenses. A recent article by The Wall Street Journal Market Watch explains that workers took out $70 billion from their employer-sponsored retirement accounts in 2010 for thing such as college tuition, credit card bills and mortgages.

Most people take out money in the form of 401(k) loans, but some cash out when they leave a company or take hardship withdrawals. I've come up with various strategies to keep myself from raiding my own 401(k).

Rolling money over to an IRA

I am often tempted to take a loan from my 401(k) because I know I can pay it back without having to pay the 10 percent penalty to the IRS. According to the study, only 15 percent of people default on their 401(k) loans. By rolling my 401(k) money over to a regular IRA recently, I will not be able to take a loan. I was able to do the rollover since I no longer work for the same company. Removing the loan temptation will make it easier for me to find other ways to pay for emergencies. My No. 1 go-to place is now an actual emergency fund that I contribute to with money that my bank moves automatically from checking to savings every month.

Getting professional guidance

The study also showed that 70 percent of those who raided their 401(k) plan admitted to having problems with basic money management. I decided to take advantage of the free financial consultations offered by the brokerage firm that handled my 401(k) as well as my new IRA rollover account. I talked to the professional about how much money I should contribute to my retirement accounts without over-extending myself financially. Now that I have reduced my contribution, I have more money to save for short-term financial goals, needs and unexpected costs.

Preparing for mid-life crisis

I'm not surprised to learn from the study that workers in their 40s were most likely to raid their retirement accounts. I know a lot of people who lose their jobs in their 40s. People in their 40s are more likely to have children in college. I know our household expenses went up when I hit 40 this year because both of my sons can now drive. I can understand why a person in their 40s with a large family might want to tap their retirement accounts to purchase a third or fourth family car. My solution has been to crank up my college fund and car savings accounts.

Ultimately, the report concluded that employers would be best to encourage their employees to build up emergency funds before contributing to a 401(k). While that is a good idea, I also think the government needs to stop slapping people with a 10 percent penalty. Most people don't raid their 401(k) plans unless they are desperate. It's unfair to penalize people for taking out their own money when they need it.

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