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Should Your 401k Be a Piggy Bank?

401k

If you have been a regular reader of Frugal Rules, then you know I like to talk about saving for retirement. One major part for many Americans to that retirement planning game is their 401k. A 401k, when used the right way, can be a great way for many to move towards the kind of retirement they’re envisioning. That’s also not to mention that you often can get free money for using your 401k. I don’t know about you, but free money is the best kind you can get. :-)

However, life doesn’t always go as we like and unplanned events come up. It’s inevitable in fact, which is why it’s important to have things like an emergency fund as well as living by some sort of budget so we have things to fall back on in time of need. What is concerning though is the number of individuals who are viewing their 401k as a fall back or piggy bank when times do get tough. I understand that there may be times where it’s the only option, but recent studies show that more funds are being withdrawn prematurely from 401(k)s and often times in small amounts – i.e. amounts under $10,000. These withdrawals, while seemingly harmless in the short term can have significant ramifications in the long run.

If you’d like to read more about why a 401k is not a suitable piggy bank and what it’s truly for, read my latest article at Daily Finance.

 

Photo courtesy of: Tax Credits

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I'm the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. I'm passionate about helping people learn from my mistakes so that they can enjoy the freedom that comes from living frugally. If you're wanting to grow your blog, check out my blog coaching services to see how I can help you take your site to the next level.

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3 Comments

  • I go back and forth on this. To take the other side, I think we can all agree that between the two, over-funding is better than under-funding. And if over-funding means you have to take a withdrawal from time to time (and do it in a strategic way so as to avoid penalties), then that’s not the worst thing
    Mario Adventuresinfrugal recently posted…What’s your favorite gift to start college graduates thinking about personal finance? (Mine involves Roth IRAs)My Profile

    • John says:

      I understand your point Mario, though that’s not really the point of my article over at DF. It’s not really a question of over-funding vs. under-funding, but an issue of people taking more and more premature withdrawals, especially in small amounts and especially among younger generations. The problem that it brings out is a limited long term view. I understand that there may be times where you have no other choice, and in those cases I get it, though that doesn’t seem to be the case in the studies I’m reading. That said, yes, I’m all for over-funding…especially if it stays there. :)

  • Derek at MoneyAhoy says:

    Taking money from your 401k is a horrible idea because of the 10% early withdrawal penalty. It is MUCH better to start a Roth IRA if you think you’ll need to tap into your account regularly – you can withdraw your contributions (not earnings) without any penalties at all!!!

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