Last month the Federal Government ruled that employers will no longer require employees to take out a 401(k) loan before applying for a hardship withdrawal. But is taking money out of your 401(k) before you retire ever the right move?
One financial expert says no. “Everyday Millionaires” author Chris Hogan told YFi PM that he believes the government’s new rule is a big issue that some retirement account holders may come to regret.
“People are working long and hard to try to provide for their dreams and their future,” Hogan stated. “The last thing you want to do is to stop that growth. Whenever you take money out of a 401k that's exactly what's happening.
He added: “The government thinks it's doing a favor...but in reality, what is this is going to do is allow people to work longer, harder, and it means they're not going to be able to live their dreams.”
He suggested that would-be hardship borrowers should “take a little deep breath” and consider other options — such as getting a side gig, or at least putting yourself on a budget.
“You're going to be happier in 15 or 20 years that that money was allowed to grow, instead of you pulling it out, and you're trying to figure out how to make ends meet,” Hogan insisted.
‘Spending too much’
Meanwhile, what exactly qualifies as a hardship? Hogan warned that consumers have to be careful about what they might call a fiscal emergency.
“Your kids educational expenses, not an emergency,” Hogan stated. “You knew they were growing up and they were either going to go to college or go to trade school.”
Health care might be an exception to the rule, but “housing isn't even an emergency. We've got people that are buying too much —I call it ‘house poor,’ they’re spending too much.”
The author suggested the government could help by removing limits on Roth individual retirement accounts (IRAs), but “what people need to do is take a deep breath and realize the government's not going to save the day.”
As the rules around dipping into 401(k) accounts early change, and Social Security’s future looks uncertain at best, Hogan said people should ensure they’re taking the right steps to ward off struggles late in life.
“You know, if you leave the door half open, people walk all the way through it,” Hogan stated.
“I want people to realize this money is for your future. Social Security may or may not be there. We all know what's on track to be insolvent by 2034. So if people don't put away money, if we don't save, they're not going to have any to spend later,” he said.
“I just want people to take control of their future. Get on a budget, get yourself out of debt, start to save for an emergency fund, then invest and leave the money alone,” Hogan added.
Chelsea Lombardo is a production assistant for Yahoo Finance. You can find more of her work here.