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Wednesday, January 16, 2013 - 7:57pm
More and more Americans are draining their 401Ks to pay their current, monthly bills. It's a quick fix to paying down debt but experts say it's very expensive, and will cost you much more in the long run.
A new study by Hellowallet shows 1 in 4 Americans with some kind of retirement account withdraw money from those savings to pay for bills like mortgages, credit cards, and college tuition. In 2010, that amounted to more than $70 billion in annual withdrawals.
"You really shouldn't be taking money out of a long-term pocketbook to pay for something that's short term. That is true. Don't withdraw it and if you do have to withdraw it, then look at your loan alternatives," said Monica Narvaez, a Certified Financial Planner at Strategic Wealth Advisors in El Paso.
"Loan alternatives" means you can borrow money from your 401K that you pay back to yourself later at a fixed interest rate.
The most expensive way of taking 401K money is withdrawing it all before you retire because you pay a 10% penalty fee plus income taxes.
Results of the Hellowallet study also finds workers in their 40s are the most likely to borrow against their 401K. A second financial study reveals the older you are, the higher your credit card debt.