Recently I was in a meeting with a young client when she confessed that she was having cash flow problems. As a real estate agent, her income is dependent upon deals closing — and all of her deals that were supposed to close in December hit obstacles.
She has some money in a 401k and an IRA account, $30,000 in credit card debt, and she owns two properties; one that she rents out, and one that she lives in. Given all that, she was asking me what she could do to become more liquid, up to and including taking the money out of her IRA or 401k.
The deafening sound of alarm bells ringing in my head disoriented me temporarily. I gained my composure and said, “Don’t ever take money out of your 401k because it’s a much bigger financial setback than what you might think.” Here’s why:
- You have to add the amount you take out to your gross income, possibly changing your tax bracket.
- There is a 10% penalty on top of the taxes.
- Once removed, that money is no longer growing.
I explained to her that there are other creative ways to lessen the impact of a decreased cash flow, like cancelling subscriptions she didn’t use. She could also transfer her credit card debt to a card with 0% introductory interest — there are plenty of them out there. The interest-free period will only last a few months, but that might be enough time for the cash to start pouring in again.
I am living proof of why you should never take money out of your retirement plan. After I closed the family business over 25 years ago, I didn’t work for a couple of years. Shockingly, my ex wasn’t working either. We emptied out our 401ks to make ends meet — and I didn’t know it then, but that was the biggest mistake of my life. After getting my act together with the help of a divorce, I remember my jaw literally dropping when I figured out how much money I would need to retire.
Luckily, since I have to work until I’m 117, I have a job I love — and I can warn young women and men about making the same mistake. To find out more about how money coaching can help you, click here.