Avoid Tapping Into Retirement Account

Young adults should find alternatives to tapping into their retirement funds.

If you’re in your 20′s or 30′s, retirement may seem far away. If you are facing financial strain due to an underwater mortgage, job loss or another significant expense, borrowing from or making early withdrawals from a 401k or individual retirement account may make sense, but you should try to find alternatives before going this route.

A recent Fidelity study found 62,000 Americans made hardship withdrawals from their 401k accounts during the second quarter of 2010. Of that number, 45,000 had made a previous hardship withdrawal the prior year, indicating that many Americans are still saddled financially. Withdrawing from retirement may not only endanger your future, but you will also incur a 10 percent early withdrawal tax penalty, stripping away even more of your hard-earned money.

“We recognize that for some, taking a loan or a hardship withdrawal from their 401(k) may be their only option because it’s their only form of savings,” said James MacDonald, Fidelity Investments workplace investing president. “However, we want to make sure that before workers tap their retirement accounts prematurely, they are fully educated about both the penalty that may be incurred and the long-term implications for their retirement.”

Although paying off a student loan or credit card balance may seem dire, saving adequately for retirement is equally important. If you find yourself in debt, consider ways to pay down an outstanding bill. Cutting down on spending and applying more to your monthly payments is a great way to start chipping away at your balances.

Create a budget. Although this task is simple, studies show that few Americans actually employ this method. Budgeting helps you explore how much you spend in each area of your life, and may show you areas in which you can afford to cut down.

For more serious debts, contacting lenders and discussing repayment options is a good first step in exploring solutions. Student loan issuers may be able to extend your repayment period to lower your monthly minimum. If you have a decent credit score and carry a number of credit cards with different interest rates, you may also benefit from transferring your balances to the card with the lowest rate. Be cautious about transferring balances to credit cards that offer introductory balance transfer rates. Read the terms and conditions carefully to make sure the regular rate that will kick in after the intro period ends is not too high.