Ask The Money Coach

It's a bad idea to take an early withdrawal, loan or a disbursement from your 401(k). Consider it untouchable until retirement age, as it is not a good financial move to use it to pay off credit cards or remodel your kitchen.

As the U.S. unemployment rate spikes to 9.5% as of June 2009, more and more people are considering taking a distribution from their 401(k) or withdrawing from other retirement accounts to help meet their expenses. This is a move of last resort, and even then it still remains a bad idea.

Any money you withdraw from a 401(k) or take as a distribution after losing your job, is like stuffing 40% of it down your garbage disposal, flipping the on switch and saying goodbye to that money forever.

When you take money from your retirement account before age 59 1/2 you:

• Pay a 10% penalty on the withdrawal
• Have to report the money as income on your taxes, potentially taking another 28% hit
• Lose compounded growth of your retirement account
• Have less to live on when you actually do retire

I spoke with the Associated Press about 401(k) withdrawals and loans back in March 2009. Watch this video to learn more.

[youtube=http://www.youtube.com/watch?v=6SXBJlkbmvE]

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 Lynnette Khalfani-Cox, The Money Coach is a personal finance expert, speaker, and author of numerous books on personal finance. She appears frequently as an expert commentator on television, radio and in print.