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Saturday, February 24, 2007

Costly Spending

The most expensive money you can spend is....

Money from your retirement plan.

If you haven't reached retirement age, and you take money out of your retirement plan, you don't just have to pay tax on it, but you'll also pay penalties. A lot of folks think that when they get into a financial bind, their 401K or IRA is the perfect solution.

And then tax time rolls around.

If I got paid based on how many clients gave me the shocked comment at seeing a balance due that "they had taxes taken out", I'd have a nice retirement nest egg of my own. The trouble with people taking money out of their retirement plan, even if they have taxes withheld is that it's never enough to cover the penalty. More importantly, few will take out state taxes, so even if the person is lucky enough to have all the Federal taxes and penalties covered with extra withholding and credits, they end up with a huge State balance due.

It's actually cheaper to take out a loan than it is to pay the taxes and penalties on an early distribution from a retirement plan. If you must raid the good ole nest egg, make sure you set aside more than you think you'll need for good ole Uncle Sam. Otherwise, come tax time, you're going to be in a bigger bind. Plus, when it comes to retire, you're not going to have as much to do it on.

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