Financial Planning Tip for June

Don’t take money from your retirement account (IRA or 401(k)) until you retire.* Sometimes it is tempting to take money from your retirement account to pay for other things. For instance, you may want to pay off a high-interest credit card loan. This may sound like a wise choice, but we’ve done the math and it is not. Even if you have credit card debt with a high 27% annual interest rate, it’s better to pay off the loan over time with interest than to sacrifice money in your retirement account. You give up tax-deferred growth of your retirement money, plus you will owe taxes and penalties on top of that.

Having your retirement assets grow without being taxed is a great deal. The power of compounding works for you. With its carrot and stick approach – tax advantages on one end and stiff penalties on the other – the government has deliberately made it costly to raid your retirement account. So don’t be tempted to rob Peter to pay Paul.

* This doesn’t apply to inherited IRAs which have mandatory distributions. However, deferring the distributions as long as possible is still wise.