Key Takeaways
- In building your financial defenses, are you aware of how your 401(k) fits in?
- If you have multiple 401(k)s from past employers, you likely have the option of combining them with your current 401(k).
- Taking a loan on your 401(k) is a tax-free way to access money if you really need it.
If you study military history, you may know that, in the 15th century, there were star defensive forts built to withstand attacks for many months – sometimes up to a year! Gunpowder and mortars were new inventions, so it was important that these forts be able to hold against them.
Likewise, if you’re building your financial defenses, you’ll want there to be enough protection to withstand whatever comes your way. Of course, these days it’s COVID-19, causing 40 million people to lose their jobs. So what do you do to build those defenses?
Well, number one is always cash. It’s important to have cash you can readily access. In the case of COVID-19, the government tried to help a bit with that. Next is credit cards, which can be used to pay bills in a pinch. But what’s next?
Perhaps you’ve had 401(k)s at previous jobs. It’s not uncommon for people to leave balances in their 401(k)s and forget about them. If you’re looking to build some defense, combine those 401(k)s.
You’ll have several choices with your 401(k) savings. You could simply distribute the 401(k) to yourself, paying the associated penalties and taxes, but that’s not the best choice. You could choose to roll the money over to an IRA and continue to grow it for retirement. That’s not a bad choice, but yet another option may be to combine it with your current 401(k), if you have one at your current job. Most new 401(k)s accept money from other 401(k)s. So you can take your 401(k) money from your previous jobs, combine it with your current 401(k), and continue to contribute to it.
Now, if you need cash and you’ve exhausted your other defenses, you may have the option of taking a loan on your 401(k). Fifty percent of 401(k)s allow this. While it’s not ideal to take loans from your retirement account, if you’re at the point where you’re thinking of taking out a loan, this may be a viable option for you.
If your 401(k) allows you to take out a loan, you could take up to 50% of the balance, up to $50,000, tax free. And when you pay it back, you pay it back to your account with an interest rate – but you’re the bank and you get the interest. So it’s not a bad strategy if you’re forced to make it through a tough financial situation.
So give this some consideration. It’s a bit of a unique strategy, but if you have forgotten 401(k)s, it may make sense to consolidate them and look into whether a loan is an option for another layer of defense. Until next time, enjoy.