10 Costly Retirement Account Mistakes (Part 2)
Money Girl explains how to steer clear of 5 costly 401(k) mistakes that could hurt your personal finances.
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Mistake #4: Taking a Loan
Many workplace retirement plans allow participants to borrow money from their own accounts and repay it over several years with interest. While this might seem like a convenient way to access your money, it can be dangerous.
If you don’t repay the loan on time, it’s considered an early withdrawal, subject to taxes and a 10% penalty. Additionally, if you leave your job or get fired, you typically have to repay the full loan amount with interest within 60 days—otherwise it’s considered an early withdrawal.
Another problem with cracking open your retirement nest egg is that the money you borrow is taken out of investments and can’t grow. That can really cost you over the long term.
If you’re having financial troubles, consider temporarily suspending your retirement contributions, finding an additional source of income, or negotiating payments with creditors, instead of borrowing from your retirement accounts.
As I previously mentioned, if you declare bankruptcy your workplace retirement account is generally protected from creditors. So never tap the account without first getting financial or legal advice.
See also: Should You Take a 401(k) Loan?
Mistake #5: Not Utilizing Free Advice
More employers are offering free or low-cost financial advice as a benefit through their retirement plan. But surveys show that few employees seek it.
In some cases, in-plan retirement guidance comes with an annual fee that could be up to 0.5% of the value of your retirement account. But this is still less than most fee-based financial advisors, who typically charge 1-3%.
If you’re getting close to retirement or have a complex situation, having a professional advisor is especially important. He or she can make sure you’re on track to accumulate enough money to reach your goals and retire comfortably.
An in-plan advisor can help you make decisions like whether to use a traditional or Roth account, which investments to choose, and whether to take a loan from your retirement plan. So find out how much they charge and compare it to the cost of advisors outside of your retirement plan.
I hope this series on retirement mistakes will help you avoid costly errors and stay on track with your contributions. If you have a retirement account question, be sure to send it to firstname.lastname@example.org.
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