THE BLOG
09/11/2014 01:14 pm ET Updated Nov 11, 2014

Stop Using Your 401(k) as a Piggy Bank

Did you have a piggy bank as a child?

I remember having a piggy bank in my room when I was a kid. You know the kind. It was a pink pig with a cute smile on its face. It had a stopper in the belly that you could easily pop open and dumb the coins. I would buy candy, baseball cards or the occasional toy.

Easy access to my savings. Well, that's the problem...easy and access.

Unfortunately, many 401(k) participants think their retirement plan is this pink piggy bank. Just pop the cork and dump the coins for the next financial whim such as:

"My kid need braces."
"I have to fix my car."
"I need to pay off debt."
"I have to get rid of these medical bills."

You really need to resist the urge to splurge! Your retirement savings is there for you future. The only time I could envision tapping your 401(k) is in the event you are unemployed for a long period of time. If you have used up all other savings, and have no other choice.

Here's how to stop popping the cork on the 401(k) Piggy Bank:

Build Your Reserves
Why not temporarily suspend retirement contributions so you can build up a cash reserves. I'm not saying stop saving, I'm saying stop temporarily if you are strapped and have no emergency fund. Once this money is available, you cash reserves will be there for the next time you have a crisis. Voila! No more dipping into the 401(k) pool. I recommend 3-6 months of monthly expenses be allocated to this account.

Alternatives Sources to Borrow From
While I'm not a fan of debt. There may be times where you have to access borrowing for one reason or another. As an alternative to raiding your 401(k), you could access home equity lines or credit cards. Home equity lines of credit will have the best rates. Credit cards will charge more, but will keep you out of your own 401(k) cookie jar. Just make sure you have a plan to pay these back in a timely manner.

The Cost
Accessing your 401(k) for a loan or withdrawal can cost you a small fortune. If you borrow, then switch employers before the loan is repaid, then it will count as a distribution. If you are under 59 1/2 a 10% penalty will be assessed. Plus, the unpaid portion of the loan becomes a taxable distribution and you have that added to your income for the year. Possibly throwing you into an even higher tax bracket! Not to mention the cost of not having those funds for your retirement. You can make up the savings, but you cannot make up the lost time of having that savings invested.

The Bottom Line
I really have a problem with the naysayers of the 401(k), saying it is the problem with retirement savings. It is what has caused the retirement crisis in America. That's simply not true. It's human behavior.

Allowing people to have access to such a large sum of money for retirement is just dumb. In my experience they find a way to get to it and a reason to spend it. I've seen participants try to conjure up situations only to get access to these funds. Stop allowing access to these funds through loans. It's simple. If it's for retirement then leave it for retirement.

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