Money Mistakes Chronicles #2: 401k Withdrawal

by Matt B

Do you want to sacrifice this kind of retirement?

Do you want to sacrifice this kind of retirement?

Let’s rewind a few years.  I was living with my girlfriend, working and trying to get by.  It wasn’t easy, but we managed.  Sometimes with a bit of help.

Neither of us had a car, and we were strapped for cash.  Having not been living together for long, and having spent a good sum of money for my (second) move from New York to Florida, I had to find some money.  Even more so than usual because I needed a down payment to purchase a car so we could get to and from work with ease.

My answer to this problem?  A Withdrawal from my 401k!

I had previously worked for about 5 years with a large retail company, and had a 401k plan with them that had to be liquidated or transferred.  I chose to take the cash.  Since hindsight is 20/20, I now realize what a mistake this was.  My view was that these funds were nothing more than free money.  After a few years with the company, the 401k plan was automatic.  I did not have to contribute, but I did add a very small percentage to my account.  In turn, my company matched that contribution.

I was young, and realized that these plans are intended for retirement.  That was just about the last thing on my mind.  My final collection, after the withdrawal penalty and taxes was just about $2,500.  It was enough to help us with bills and put down on the truck.  (Which I am still driving today).

I thought it was the right answer at the time-

The correct choice would have been to save for a few months, after transferring the 401k into an IRA account.  Unfortunately, I was young and did not even realize this was an option.  I should have done my homework and put this money away for it’s intended purpose, retirement.

If I were smart enough then-

If I could have done the calculations myself, I would have realized that this $2,500 at a modest interest rate of 5% would have yielded  $28,668 over a 50 year time line.  If I could have managed 10% out of this money, it would grow to $293,477 over the same time period.  Compound interest is a great thing.  Of course, that amount of money will be worth far less in 50 years, but it would still have beaten inflation and given me a decent amount to begin my retirement with.

When is a 401k withdrawal a viable option?

If I learned anything from this experience, it is that you should not sacrifice your financial future for your financial present.  There are ways to make more money, take advantage of them so you do not have to grasp at straws when you get older.  Even if you are on the brink of financial ruin, many retirement accounts are exempt from bankruptcy.  I am not trying to recommend bankruptcy here, just saying that if your situation is that desperate, your retirement money may be safe.
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{ 2 comments… read them below or add one }

Sean June 15, 2009 at 9:46 pm

interesting. I had a 401k at my old employer but I never did anything with it, and I still get statements. Does it atomatically become an IRA or what is the deal with that?

mattb June 15, 2009 at 9:57 pm

No, if I were you, I would see about rolling it over into an IRA. It will still accrue interest based on your fund choices, but it will be more easily manageable in an IRA. I’ll help you if you need it, but it should be pretty simple.

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