Why 401k Tapping Can Be a Costly Mistake

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More Americans are dipping into their 401ks to pay the bills, with more than one in four bleeding their funds to pay credit card bills and college tuition.

''You see more people that have lost their jobs, maybe have decided to stay home because of what's going on in the economy and it definitely is on the uprise," financial planner Jamie Serrano told ABC News.

A growing number of financial planners are calling it a costly alternative that robs the future.

They warn the move incurs federal and state taxes and possibly a premature distribution penalty if you are under the age of 59 and a half.

"If you pull out $10,000, you may end up with five by the time you pay federal tax, state tax and penalties," Serrano explained.

Instead, Serrano suggests a three- to six-month emergency fund, cutting spending, and-or a property refinance.

 

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