Rich---401K question

[armygf08]

My job is going out of business and I have invested in the 401K plan. Before the stock market took a dive, I had a little over $6K in there, but not anymore. I took out a loan and I currently owe $1600. The remaining balance I have in my 401K is $2700. I know that Im going to be taxed for the loan, cause I dont have the money to pay back. I constantly hear people saying never touch your retirement. But for me, being 25, I feel that $2700 is not that much to keep in there, I'd feel different about it if I had that $6k in there. I feel that I could benefit from it more right now cause when my fiance and I get married, we are going to be buying a house right away.

Is cashing it out something that I really should not do?

[Rich Lunsford]

Great question! This decision is a tough one. Do I use the money today or let it grow for tomorrow? I tend to agree with those who advise you to let the money stay in the 401(k) plan for a few reasons. First, you have already seen first hand what taking out the loan on the 401(k) has accomplished. The $1600 loan will actually cost you the taxes on the $1600 plus any interest you had to pay while the loan was out. Now what happens if you take the remaining money out? The $2700 is first taxed as income at 15% to 25% or whatever your marginal income tax may be. Then you get another 10% penalty from the IRS for accessing your retirement money before your age of 59 ½. So already you have a possible 35% of your $2700 going to taxes. I understand that the need for the money is today, but choosing to pay 35% of the $2700 seems less of a good idea. Second, what if that same $2700 remaining is left alone? Assuming 40 years at 8% average growth per year = $58,656. You could have almost $60,000 for your retirement. The question is how much do you “need” the $2700 today. Is it worth a possible $60,000 later on in life?

Rich Lunsford is a CERTIFIED FINANCIAL PLANNERTM practitioner with USAA Financial Planning Services, one of the USAA family of companies. Rich holds the Series 7 and 66 securities licenses. Rich also holds the designations of Chartered Financial Consultant (ChFC®), Chartered Life Underwriter (CLU®), and CHARTERED RETIREMENT PLANNING COUNSELOR (CRPC®).

Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

[Kitten35]

I'd leave it in too. It's not that much to save $1600 again, and then you wouldn't lose.