Make Your Money Work for You: How to Get More From Your 401K

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Latinos are tapping into their 401k plans more than ever before, reports USA Today. The report states that 40% of Latinos have taken hardship withdrawals or loans from their retirement fund. We exclusively spoke to Wells Fargo Senior Vice President of Investments, Alex Vicencio, about the best way to get more out of your 401k and what to keep in mind if you are considering borrowing from your 401k. Check it out below:

Latinos are tapping into their 401k’s more than ever. What are the rules for hardship withdrawals?

There are generally six acceptable rules that the IRS has put into place. First, one of the exceptions would be the purchase of an employee’s principal resident. Second would be unreimbursed medical expenses for you, your spouse or a dependent. Third is the payment of college tuition and some related educational expense. The fourth one allows you to tap your 401k to prevent eviction from your home or foreclosure on your mortgage. There’s also another one for funeral expenses, which have to do with expenses related to someone’s principal residence. So these are some pretty dire situations that allow for a hardship withdrawal. When I hear people wanting to do this, nine times out of 10 they’re not doing it for one of these situations. If you're thinking, “Hey I’m in a jam, my car’s going to get repossessed," sure, that is an emergency BUT it's not one that the IRS considers to be an emergency.

What’s the fine print for these withdrawals?

The biggest fine print takeaway is that you have to pay it back through payroll, which means that you have to be employed at the job where that 401k is given to you in order to pay that back. So if you’re looking to borrow and a) you get fired or b) you’re looking to leave the company for another job, then that loan will be due generally within 90 days of leaving employment. So make sure that you’re obviously within what you can control and you’re planning to be at this job in order to pay that loan back. 

What advice would you give to someone who is considering this path?

My advice would be to only do it if that’s the place to borrow as a last resort. I generally think that borrowing against a 401k, while it may be better than maybe borrowing on a credit card, it’s not as clear-cut or as beneficial as some people may think. My advice is to try to see if there’s another way that you can get the money than borrowing on the 401k. The rules get a little bit more complex then just, "hey I’ll borrow against it and I’m paying myself back interest," and although that’s true, I would steer you in that direction of at least being able to analyze if in fact borrowing from the 401k is in the best way to do it because there’s a lot of other issues to worry about that could become detrimental to you.

What is the best way to get more out of your 401k?

The reality is that most people have a 401k and most people are not financial experts, but I think as long as you have good communication and you arm yourself with the information necessary to make the good decisions, you can make the most out of it. They’re powerful plans, we see clients become really wealthy over the long term investing in these, so you need to get as much information about it as possible.

Where would one fine a reputable financial advisor for help on this? 

If you go to www.cfp.net that will give you a list of all the essentially CFP or certified financial planners, so you can punch in your zip code and get a list. I also recommend referrals because then you have someone who has worked with someone you know. You can also look to your bank or financial institution for help.

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