Should You Ever Cash Out Your Retirement Plan?

Are you thinking about cashing out your retirement plan? There are some good reasons and some bad reasons to do so, but both of them require some consideration. Here's what you need to know about cashing out your retirement plan and the consequences that you could face.

What Are the Downsides to Cashing Out a Retirement Plan?

In addition to suddenly being behind on your retirement planning, you will also suffer from some direct consequences. If your account isn't fully vested, you could lose some of your investments; sometimes the investments made by your employer are contingent on your own money staying in. Additionally, you could lose a large amount to taxes. Normally, you will lose about 30% of what you pull out.

Why Should You Cash Out a Retirement Plan?

There are some times when it makes sense to cash out of your retirement plan. If you're cashing out to purchase a home, it may make sense; you could save more money over time. Owning a home also means that you won't have housing costs once you retire, and you can always cash out of your home if you need extra funds.

There's also another reason: if you have large amounts of debt. If you're currently paying 20% on your credit cards, the 6% yield on your retirement account may not mean anything. In this scenario, it actually does make more sense to cash out your retirement plan to pay it off. However, it only makes sense if you're sure you aren't going to get into debt again. Many people have a certain "debt load" that they will naturally gravitate to.

What Are Your Alternatives?

If you need money, you don't always have to cash out a retirement plan. Some retirement plans actually let you borrow against them, so instead of cashing out of the plan, you can instead give yourself a loan and pay yourself back over time. Psychologically, this can be better, as it ensures that you will pay your money back. Sometimes, you even pay it back with interest to yourself.

Before you do anything to your retirement plan, you're going to need to take everything into account. A retirement planning service can help you go over your finances and determine whether this is really the right choice for you as well as discuss various retirement solutions with you. They may also have other options available for you, such as a low-interest personal loan or a mortgage loan that could help you get a home without jeopardizing your future retirement funds.