Here’s Why Suze Orman Says There Is Never a Good Reason To Tap Into Your 401(k) Before Retirement
As high inflation persists, more Americans have been taking hardship withdrawals from their 401(k) plans. A recent Bank of America study found that the number of its 401(k) participants taking hardship distributions increased 36% year-over-year.
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If you find yourself in a position where you need cash to cover an unexpected — or even an everyday — expense, should you withdraw from your 401(k)? Here’s why Suze Orman, money expert and co-founder of emergency savings startup SecureSave, said that the answer is almost always “no.”
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This Could End Up Costing You Big Time
Not only do you miss out on the growth the money you take from your 401(k) could have experienced if you kept it in the fund, but you also run the risk of having to pay hefty fees.
“If you’re tapping into your 401(k) plan as a loan, if you lose your job, that money is due and payable plus a 10% penalty if you aren’t 55 years of age or older,” Orman told GOBankingRates. “That’s one of the main reasons [you shouldn’t take a hardship withdrawal].”
You’re Better Off Filing for Bankruptcy
If you’ve reached the point where tapping into your 401(k) seems like the only option, you might be better off filing for bankruptcy.
“Most retirement accounts are protected against bankruptcy,” Orman said. “You have all these people that took money out of their 401(k) plans or their 403(b) or [Thrift Savings Plan] (TSP) to pay their bills, and then the money was gone and they still couldn’t pay the bills and then they had to claim bankruptcy. If they had claimed bankruptcy [first], they still would have had all the money in their 401(k) account.”
The Bottom Line
Because of the potential penalties and risks involved, Orman said she almost never advises making a hardship withdrawal from a 401(k).
“When it comes to a traditional work 401(k) plan, I would be hard-pressed to find a good reason to be withdrawing money from one,” she said.
However, she does believe that it’s OK to make withdrawals from a Roth IRA, depending on the circumstances.
“I’m such an advocate for Roth IRAs,” Orman said, “because at least with a Roth IRA, you can withdraw any money you originally put in without taxes or penalties whatsoever, regardless of your age.”
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This article originally appeared on GOBankingRates.com: Here’s Why Suze Orman Says There Is Never a Good Reason To Tap Into Your 401(k) Before Retirement