My 401(k) is not an ATM.

I hate to admit it but I’m old enough to remember when Individual Retirement Accounts (IRA’s) first came out. They were authorized as part of the Employee Retirement Income Security Act of 1974. (ERISA Act of 1974). I was 19, in my second year of college, engaged to my lovely wife and working part time as a teller in a bank. I could have cared less about saving for retirement or even given any thought to how this one act would change the face of retirement in our country.

But this act along with others in the future shifted the burden of saving for retirement from the employer to the employee. Up until then, defined benefit plans (pension plans) were set up and funded by employers to provide their employees with some amount of monthly income when they retired. That began to change in 1974 and employees were sharing the burden of saving for their own retirement with their employers. So 401(k)’s became popular and pension plans have slowly faded away.

One of the nice things about pension plans was that the employee had none of their own money in it and couldn’t derive any benefit from it until they hit a certain age and retired. With these new defined contribution plans (IRA”S and 401(k)’s), the employee did have some of their own money in it and could have access to it by borrowing against it or actually withdrawing funds from it. The government tried to discourage this by imposing early withdrawal penalties and tax consequences.
But that did not deter people from using their retirement funds for things other than retirement. I’ve had people want to tap into their retirement accounts for lots of reasons. College expenses for a child; purchase an auto; pay off credit card debt; vacation expenses, on and on. Using your retirement account for something other than retirement is the most expensive money you can use.

Let me give you an example:

Client has run up $50,000 in credit card debt at an 18% interest rate mostly because they could live on their budget. They have accumulated $150,000 in their IRA and want to use it to pay off the credit card debt. The client is 50 years old. If they withdraw the money from their IRA, they will have to pay a 10% penalty on the amount they withdraw and that money is also taxed as ordinary income to them and they pay income taxes on it at whatever their tax rate is. We will assume their tax rate is 15%. So between the penalty, and income taxes they pay 25% of what they withdraw to the IRS. If they want to net $50,000 they have to actually withdraw $66,666. Their $150,000 IRA has been depleted down to a balance of $83,334.

If our client could get a 7% return on his IRA, it would take close to 9 years to grow it back to the $150,000 he had before the withdrawal. Had the client left it alone and simply buckled down, lived within his means and paid the credit card off over time, his IRA would have been worth $275,768 at the end of the same 9 years.

Using your retirement funds to fund other things before retirement is not only expensive, it also puts you behind in your retirement savings and you may find that when you hit retirement age you won’t have enough to retire.

That’s a big mistake!