No! Don't Touch Your Retirement!

by John Brummitt

A recent Charles Schwab survey found that 52% of people surveyed found retirement accounts more confusing than health insurance. It makes sense that people are confused. Most feel as though their retirement account is nothing more than a savings account where they deposit money monthly so they can have something in retirement.

Contrary to this belief, strict rules apply to retirement accounts, whether a 401(k), 403(b), or an IRA. The IRS requires retirement plans and their participants to adhere closely to certain rules and regulations. Some exceptions the IRS does allow, however, make for unwise decisions when it comes to your retirement account. These actions have a detrimental effect on your nest egg down the road, even if they might not seem extreme at the time.

Taking a Loan

Borrowing money from your own retirement account is a common practice. While the IRS allows retirement loans, stop and consider several major drawbacks. First, loan rules are strict: you are charged interest on your own funds and set up on an automatic payment system through your payroll (if under an employer’s plan) or through your bank account.

The money is also subject to taxation. And since your retirement funds are tax-deferred, but the payments you return have been taxed, you are taxed twice on the amount you borrow. Finally, consider the loss of interest from your investments, which can add up to hundreds of thousands of dollars depending on the loan and your account.

Cashing Out When Changing Jobs

This is another big NO! But it happens all the time. People change employment, and they cash out their retirement and spend it on something other than retirement. If you are in the middle of a job change, please don’t do this. You will automatically lose 20% in federal taxes, and if you are under the age of 59-and-a-half, you pay a 10% penalty for early withdrawal to the IRS. You give up 30% of your retirement account before you ever receive a dime. Instead, explore rollover options or just leave your money where it is (if the company allows you to do so and you are happy with returns).

Buying Stock in One Company

This can be appealing to someone looking to make good returns on their investment. The problem is, when you put all of your eggs in one basket, if the company fails or has a bad year, your retirement can suffer drastically. Diversification is the key to growing retirement funds over an extended period of time. Diversification spreads funds among many companies and reduces the risk of loss in your portfolio. While you may still experience a loss in your overall portfolio, it should not continue over the long term of your investments.

Stopping Contributions at the Matching Rate

According to most financial advisors, you should set aside 10-15% of your current income into a retirement account starting at age 25 to maintain your current lifestyle throughout retirement. Many people ask, “Should I stop contributing to my retirement to pay off debt?” Always contribute at least enough to receive the employer match to your retirement account. If not, you miss out on an important pay-package benefit, and also put yourself further behind in retirement planning. This makes it difficult to make up ground when you begin making contributions again.

Timing the Market

NO! Even people with advanced degrees in economics and finance, who have studied the market and past cycle patterns for years, have problems timing the market to make money. Don’t take unnecessary risks with funds set aside for retirement. Bad timing, even by one day, can have a huge impact on your retirement savings. Study after study has demonstrated that the best results for retirement growth come from placing your funds in a diversified portfolio built on a long-term strategy.

Timing the market means frequent trades, which adds fees to your account. Not only do you take a chance on losing on your investment due to timing miscalculations, but on the trades themselves. If you wish to “play around” with day trading or timing the market, set aside some funds for play, but don’t touch your retirement funds if you want to gain the maximum possible before you retire.

Setting up a retirement account is only the first step in building a secure retirement for you and your spouse. The years between the initial contribution and first withdrawal have to be in line with your goals for retirement. Sure, IRS guidelines (and even your retirement plan) allow you to do many things, but just because you can doesn’t mean you should!

About the Writer: John Brummitt graduated in 2011 with an MBA from Tennessee Tech University. A 2004 graduate of Welch College, he has been with the Free Will Baptist Board of Retirement since the spring of 2006.