When preparing for retirement, it can be helpful to pick up some tips from those who are already retired.
Can I borrow from my 401(k)?
Some people use money from their 401(k) when they’re still a decade or two away from their target retirement date. They often justify this move by telling themselves that it’s their money, and therefore no big deal.
What you should know...
And the IRS does permit you to borrow money from a 401(k). You may be able to borrow up to $50,000 or 50% of the amount that’s vested in the account. However, that money must be paid back in no more than five years.
Clearly, it may be tempting to take a bit of money out of your 401(k) to pay off something like a high-interest credit card.
What are the risks?
It could lead to regrets if you don’t promptly repay the loan. Here’s a scenario: if you borrowed $10,000 from your 401(k) to pay off a credit card, that’s $10,000 not earning returns in your 401(k), possibly for many years.
If you can’t quickly repay the loan, you might still meet the requirement to pay it back on time, but it could mean you weren’t increasing your contributions. This results in contributing less to your 401(k) over time, potentially costing you important retirement money.
Even if you have the money to repay the loan and contribute, some retirement plans don’t allow contributions during repayment. This is another missed opportunity to see gains, especially if you have a company match, and more time missing out on growing your nest egg.
Pay off credit cards
Shedding as much credit card debt as possible before retirement is something many retirees wish they had focused on before they stopped working. Many retirees are on a fixed income, and if that income is modest, using even a small portion of it to make credit card payments can dampen your retirement.
Unleash an HSA
Another misstep some retirees regret is not fully utilizing a Health Savings Account (HSA). A Transamerica Center for Retirement Studies survey found that more than two out of five people with household incomes below $50,000 aren’t saving enough for future healthcare costs.
You can open an HSA if you have a high-deductible health plan and no other health coverage. While employed, you can make tax-free contributions, and unlike a flexible spending account, HSAs can grow and carry over year-to-year into retirement.
HSA money can be withdrawn tax-free for qualified healthcare expenses not covered by private insurance or Medicare, such as deductibles and co-pays. However, once you're on Medicare, you can no longer contribute to an HSA. After age 65, you can withdraw HSA funds for non-medical purposes, but you'll have to pay regular taxes on that money.
SOURCES
https://www.aarp.org/retirement/planning-for- retirement/info-2023/what-to-learn-from-my- experience.html
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