Unfortunately, even if you have been saving and investing for retirement with a 401k or other retirement plan, sometimes life hands you the unexpected, and you need access to immediate capital. For many people their two largest sources of capital are their homes or their 401k plans.
If you have fallen on hard financial times, you may be wondering if it is better to sell your house or withdraw from your 401k. This dilemma affects not just your current finances, but also your future financial security. In most cases, it is best to save withdrawing directly from your 401k as an absolute last resort.
Before resorting to drastic measures to obtain funds, you must first see if the money can not be budgeted from elsewhere. Perhaps there are some cuts that can be made in your weekly or monthly spending that can be made where you can accrue the capital that you need. Online broker ETrade offers a Budgeting Calculator that can be used to assist you in your budgeting efforts.
Although your problems may be bigger than a few cuts here and there, it is worth a look into your operating budget to see if there are ways to improve your current and future situation once the crisis has passed.
Sell Your House Or Withdraw From Your 401k? What’s Right For You
In most circumstances, it is better to sell your home than it is to withdrawal from your 401k. An unqualified withdrawal from a 401k is subject to both personal income tax as well as additional fees and penalties. The total of these charges could end up costing you over 30% of your money.
Not only is that a high percentage to pay in taxes and fees, there is also the added consideration of lost gains and earnings from investments, as well as additional time spent rebuilding your nest egg. Even with short-term issues looming it is crucial to keep your eyes on the long-term implications of withdrawing from your 401k plan.
If you have equity in your home, and can stand to wait until it sells, this is the preferable solution to the issue of whether you should sell your house or withdrawal from your 401k. Consult with your personal financial adviser prior to taking any action to find the best answer for your situation.
Consider You Alternatives
If you find yourself in a position of low or no equity, or you fear that you may be facing a long and drawn out sale process for your home you may want to consider alternatives to a direct withdrawal from your 401k account such as hardship withdrawals and 401k loans.
Your plan may allow for a hardship withdrawal, and if you are facing exorbitant medical bills or inevitable foreclosure, you may qualify for this option. While you will pay income tax on the funds withdrawn, if you qualify you can avoid the additional IRS penalty.
Some plans also allow for you to borrow your own money and then pay yourself back with interest with a 401k loan. If your plan allows it, you can access a percentage of your funds for an extended period of time with no credit check and relatively low interest.
When considering if it is better to sell your house or withdrawal from your 401k, keep in mind that it is important to thoroughly research every possible solution, and not react out of fear or panic. Most situations pass eventually, and it is important for your future to react in the present with a cool head.