Tuesday, August 5, 2014
Financial experts say that it may not be a good idea to use a retirement account as a piggy bank, as so many Americans have been doing. In 2011, the IRS collected more than $5 billion in penalties from taxpayers who took premature withdrawals from their tax-deferred retirement accounts.
According to a report from HelloWallet, more than a quarter of people with 401(k)s are using their 401(k) savings for non-retirement needs. Yet nearly half of non-retired Americans are counting on their retirement accounts as a major source of income upon retirement. “One of the biggest dangers in borrowing from retirement accounts is that many people stop investing in their retirement while they’re paying off their loans . . . The sad reality is that it never gets replenished.”
To avoid taking early withdrawals experts recommend setting up different types of savings including a short-term fund that can be accessed in three to five days; a mid-term fund for bigger expenses such as education; and more aggressive long-term savings for retirement. “It’s not just about saving every penny for when you turn 65.”
See Lisa Wirthman, Why You Shouldn’t Use Your Retirement Account As A Piggy Bank, Forbes, Aug. 4, 2014.