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Beth A. Botti, CFP®, ChFC, CLU, CDFA™
Financial Consultant
California Insurance License #0G24537
612 Wheelers Farms Road, Milford, CT 06460
Phone: 203-877-6556 Ext. 169
Fax: 203-301-0736
Email: beth.botti@equitable.com
November/December 2019
Watch Those Withdrawals
With the holidays coming soon, it may be hard to resist the temptation to take a retirement plan loan or an outright distribution from your company 401(k) plan to pay for your holiday shopping. Here's why you shouldn't:
Disincentives
The most obvious disincentive to taking an outright distribution from your qualified retirement plan is the tax penalty if you are under a certain age. That’s 10% on the amount you withdraw, not counting ordinary income tax that would be due on the amount. Exceptions to the tax penalty rule include distributions taken for qualified first-home, higher education and medical expenses, or for any reason by account owners at least age 59 1/2. You’ll notice holiday shopping is not one of the exceptions.
Another reason not to take an outright distribution is it will cost you much more than the amount you withdraw, even beyond current taxes and the penalty.
For example, let’s say you take only $2,000 from your account. You might think this isn’t a big sum, but look what would happen if instead the amount withdrawn earned 6% annually, compounded daily, for 30 years. After 30 years, that $2,000 would have grown to more than $12,000! That’s six times the amount you thought you wouldn’t miss.
Plan Loans
If your only choice is between a retirement plan loan or an outright distribution and you absolutely need the money, choose the loan. Although it is a better choice, a loan comes with its own drawbacks. One is that no matter how low the interest rate is – and it will likely be lower than other alternatives – it will still be higher than 0%. This means your $2,000 loan will cost you more than $2,000 over time.You will also miss potential earnings growth of the outstanding loan amount, while you will likely have to begin payments immediately, lowering your take-home pay. One last note: If you leave your job, the balance of the loan will become due almost immediately. If your plan uses funds in your retirement account to pay off the loan, you may owe a penalty and taxes on that amount.
Spend Wisely
Armed with information about the pitfalls of taking money from your retirement plan, you might take another look at your holiday budget before you begin spending. Don’t make saving for retirement a casualty of holiday spending.GE-2572772 (06/19)(exp.06/21)
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Duly registered and licensed financial professionals offer securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA,SIPC (Equitable Financial Advisors in MI & TN), offer investment advisory products and services through Equitable Advisors, LLC, an SEC-registered investment advisor, and offer annuity and insurance products through Equitable Network, LLC (Equitable Network Insurance Agency of Utah, LLC in UT; Equitable Network of Puerto Rico, Inc.). Equal Opportunity Employer - M/F/D/V. Equitable Advisors and its associates and affiliates do not provide tax, accounting, or legal advice or services. Representatives may transact business, which includes offering products and services and/or responding to inquiries, only in state(s) in which they are properly registered and/or licensed. Your connection to this website does not necessarily indicate that the sender is able to transact business in your state. The information in this website is not investment or securities advice and does not constitute an offer. For more information about Equitable Advisors, LLC you may visit https://equitable.com/crs to review the firm's Relationship Summary for Retail Investors and General Conflicts of Interest Disclosure.
GE-6572038.1 (4/24)(Exp. 4/26)
CFP®, and CERTIFIED FINANCIAL PLANNER™ are certification marks owned by the Certified Financial Planner Board of Standards, Inc. These marks are awarded to individuals who successfully complete the CFP Board's initial and ongoing certification requirements.
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