Taking money out of retirement funds to purchase cards

[raulus]

Originally Posted by Leon

Good thoughts, DJ.
...As devil's advocate. What is the difference from taking it from one account or the other AS LONG as you account for the tax implications. Let's say I want to buy a 35k card out of my 401k. Whenever I take it out, now or later, it's going to be taxed. IF I account for that, and take 50k? out, to pay the taxes, what's the difference?

(and I have both IRA and ROTHs). I just turned 61 (dang I am old).

First, congrats on reaching 61, Leon.

Second, while the tax penalties are important, don't miss the forest for the trees here. The major point that this discussion is missing is that once you withdraw funds from a retirement account, you can never put them back in. There are very low annual limits that limit the amount that you can contribute to your tax-advantaged retirement accounts. If you start pulling cash out, then your ability to put it back into those accounts is very limited. And for those of us with a short runway between now and retirement, your ability to replace those funds is even more limited.

The ability to bank tax-deferred (or tax-free in the case of a Roth) growth in a retirement account for multiple decades is one of the easiest and low-risk financial layups in our country.

For most Americans, we already are woefully short (financially speaking) when it comes to preparing for retirement. For Americans in their 50s, the median account balance is ~$60k. If you've got $60k in your retirement account and you're in your 50s, I can guarantee you that pulling those funds to buy cards is going to leave you waaaaaaaaay short for retirement.

Let's say you pull $50k out of your Roth today, instead of leaving it in the account for the next 30 years before you need it. If it grows on average at 7% per year (which is not an unreasonable assumption), at the end of 30 years, you've got $380k, all of which is tax free. If it grows at 8%, then you're talking $500k.

Even for someone like Leon who just turned 61, the odds are good that you will live to be 80 or 90, so you may very well be keeping some portion of your retirement account invested for the next 20+ years.

Don't just focus on the tax penalties, because that's a total and complete red herring in this discussion. Remember that there's a lot more involved than just what happens today, because making this decision today could dramatically affect your financial health once you to reach retirement.