Expert: It's better to tap into a low interest rate credit card than your 401K

Dhara Singh

At a time when almost a fifth of Americans are considering withdrawals from their retirement account, Nicole Middendorf CEO of Prosperwell Financial has some advice.

“You’ve got to look at, you know, if you can get a 0% or a low interest rate on a credit card or a personal loan, or you’ve got access to some funds somewhere else, it’s better to use those dollars than to pay taxes and penalties on retirement accounts,” Middendorf told Yahoo Finance’s First Trade (video above).

Read more: What to do if you’re denied a new credit card

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The recent Coronavirus Aid, Relief, and Economic Security (CARES) Act, eased penalties on retirement withdrawals. Americans can withdraw up to $100,000 from their retirement accounts due to coronavirus related hardships without incurring a 10% penalty. 

Middendorf highlighted the cost to consider in withdrawing from your 401(k). Dollars extracted now can hinder future compound growth.

“You really want to look at if you take out $10,000, $50,000 whatever the dollar amount is of the retirement account, the long term effects of that,” Middendorf said. “It’s not just the taxes you’re going to have to pay— you’re really hurting yourself... by doing so.” 

How can I avoid taking out funds if I have liabilities to pay?

If you need the funds to pay your mortgage bills, Middendorf advises Americans to reach out to their bank or lender. 

“A lot of lenders out there on residential and commercial property are allowing people to not make payments or giving them a period of time,” Middendorf said, “noting that you have to be careful if you’re doing that because it’s not that you don’t have to make those payments.”

Pedestrians walk past a branch of a Capital One bank, with cafe and ATM, in Los Angeles. California on July 30, 2019. (Photo: Frederic J. BROWN / AFP)

To Middendorf’s point, recent guidelines by the FHFA have outlined that consumers will have more than one option of paying the amount they’ve deferred on their mortgage. Previously, consumers would have had to pay the amount in a lump-sum, but now holders of government-agency-backed mortgages may have the option to add on the amount on the end of their loan (depending on their situation).

“Tapping into your retirement accounts, be it a 401(k) or an IRA, is the ultimate last resort,” Middendorf said.

Dhara is a reporter Yahoo Money and Cashay. Follow her on Twitter at @Dsinghx

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