Should I withdraw money from my 401(k)?

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Being financially healthy doesn’t necessarily mean being rich, but it does mean preparing for your future. One way to prepare, apart from joining MoneyLion (learn more: online | mobile), is by establishing a retirement savings account. You can do this through your employer with a 401(k) plan or on your own with an Individual Retirement Account (IRA). Check out Choosing the right retirement account to learn more about your options.

Saving for the future is critical to financial health

Setting aside money for retirement may feel daunting, but it’s important to start as early as possible to maximize your benefit from compound interest. Retirement plans help make saving easy by allowing you to contribute a little into your account every paycheck. MoneyLion Plus takes the same approach, with incremental paycheck withdrawals that are invested into your guided investment account. These funds can also be used to supplement your retirement income in the future.

Consider your retirement savings untouchable

Retirement accounts should be used for just that, retirement. We suggest leaving your 401(k) or IRA funds untouched. If compound interest isn’t convincing enough, think of how much better retirement would be on the beach.? It’s also important to note that withdrawals from your 401(k) or IRA are often penalized with a 10% tax on top of your normal income tax rate if you withdraw before the age of 59 ½.

Understanding 401(k) loans

If you must withdraw from your 401(k) due to an emergency, many people consider taking out a 401(k) loan. Your 401(k) plan may allow for you to loan yourself up to $50,000 or half of your current account balance. Sounds almost too good to be true. Here are some pros and cons of doing this:


You have access to a loan without having to do any credit checks. The interest rates are generally low, and both principal and interest are paid back directly to you, instead of a bank.


There are quite a few. First, if you remove money from your 401(k) account, you are losing any potential gains, and you aren’t allowed to contribute to the plan while you have a loan.

Furthermore, while contributions to your 401(k) are made on a pretax basis (that is, your employer transfers some of your pretax income directly into the retirement plan without withholding taxes), you’ll have to pay the loan back with your after-tax dollars. That means you’ll essentially pay tax twice, once to put the borrowed funds back into your retirement account and then again when you withdraw the funds during retirement.

Lastly, if you quit or are terminated from your employer, you usually owe the full balance back within 60 to 90 days.

Is my 401(k) safe during bankruptcy?

An additional fact to note is that if you file for bankruptcy, debt collectors may not touch your 401(k) or other retirement accounts. However, it is important to understand that you cannot withdraw these funds while filing for bankruptcy because as soon as they are commingled with your other assets (e.g., checking or savings account) they are up for grabs from debt collectors.

Do I have a penalty-free withdrawal options?

Don’t want to take out a loan, but aren’t crazy about paying the 10% early-withdrawal penalty? Stay tuned for part two, when we’ll discuss penalty-free withdrawals from your account. Yes, it’s possible.

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