LEAVE THAT IRA AND 401k ALONE!

We've been living it up on borrowed money. When you can't borrow any more, you're living on borrowed time. We borrow to buy cars that do more for our vanity than for our transportation needs. We borrow to buy electronic goodies that will impress the neighbors but won't improve the quality of the TV shows we watch. We borrow to pay bills that will recur before the ink is dry on last month's loan. We borrow to pay off our borrowing. Danger signs abound. We max out our home equity credit. We max out our credit cards. We max out our "rainy day" savings account. What's next? How about maxing out our future---that is, cashing in or borrowing against our retirement funds, such as the popular IRA and 401k plans. This warning applies to ALL future retirees, whether R day is decades or years or months away. DON'T PAWN YOUR FUTURE---YOU MIGHT NOT BE ABLE TO RECLAIM IT Reportedly almost half of all 401k plans are either being cashed in prematurely, or borrowed against for so-called hardship distributions, which are allowed by the IRS. If you do either, you face some very big catches. The hardship distribution loans can be made for medical expenses, to buy a home, to pay tuition and to make repairs from storm damages, among other things. But it doesn't take much under-the-table juggling of the books to borrow for a cruise or a new car or a stylish wardrobe and disguise those loans to pass the IRS tests. If you do this, you're only fooling yourself. After a few decades of observing the odd financial habits of fellow Americans, I can assure you that cashing in or borrowing from your future nest-egg is extremely ill-advised. That money is too often are not replenished or repaid, and then you wake up one day and, TA DA, it's the future. But you're far short of the money you had hoped to have. You spent it many years ago on the cruise or new car or stylish wardrobe, all of which are now just memories. TALLY THE COSTS If you cash in all or part of your 401k, the money you take out is subject to income taxes. And the amount you take out can bump you up into a higher tax bracket, thus raising the cost of your nestegg raid. Further, if you cash in before you are 59 1/2 years old, the IRS will hit you with a penalty of 10% of the withdrawal. That's in addition to the income taxes. If you borrow against your 401k---and many employers will allow this for the hardship situations---you face even more complications. In general terms, you might be able to borrow as much as 50% of the fund, but it must be paid back in about five years. If you fail to pay it all back, the unpaid balance is subject to income taxes. The same 10% penalty applies if you're under 59 1/2. WORST CASE SCENARIO To make matters possibly worse----much worse in some cases---some employers won't allow you to make contributions to your plan if you have a loan outstanding against it. That means you'll be losing out on any contributions the employer might make during that time. And---a double-edged dilemma---if you're repaying the loan, you likely won't have enough extra cash to make your regular contributions to the 401k. Thus do nest-eggs shrink out of site at a time when you can least afford it: you're retired. There are similar income tax and penalty consequences for early withdrawal of IRA funds. Remember this: If you reach retirement and you find you don't have enough money to live in the style you had hoped for, YOU DON'T GET A DO-OVER. You can't go back to age 30 or 40 or 50 and start again. Better to forego some non-essentials today so you can have the essentials when you need them. [This article supplements Chapter 18, pages 529-531 in Personal Finance. Access the textbook by clicking on the box in the right column.]