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One of Suze's long-held principles is to never take money out of a 401(k) until you retire. Tracee, who says she's been hit by the recession, wants to know why she can't remove $5,000 to help her during these hard times.

"A 401(k), which is a retirement account, is not for a rainy day," Suze says. "It is for your life during retirement. And if you take money out of a 401(k) to save yourself for a day, you are going to give up possibly a lot of money during your retirement life."

Suze explains why taking money out of a 401(k) isn't worth the small payoff. "When you take money out as a withdrawal, you will pay ordinary income taxes and a 10 percent penalty. On a $5,000 withdrawal, after taxes and penalties, that will leave you with approximately $3,000."

On the other hand, if Tracee keeps that $5,000 in her 401(k), at average market returns the payoff is great. "It would be worth $35,000 in 25 years. In 35 years, it would be worth $81,000. In 45 years, it would be worth $181,000."

Since Tracee is in a tight spot right now, Suze has advice for a quick fix. "You do what's called an IRA rollover," she says. "You take your money that's in the 401(k) and do a rollover [into] an IRA account. Then, once it's in that account, you can take out the money you need …as long as you put it back within 60 days." If paid back in the time allotted, Suze says you will not pay taxes or a penalty. "You can do that once a year. So you now have this money, you can give yourself a short-term loan, and if you pay it back in 60 days, great. If you don't, you will owe ordinary income taxes on it and a 10 percent penalty."
FROM: Suze Orman with Emergency Financial Advice for America
Published on January 01, 2006


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