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Is It Ok To Dip Into Your Retirement Account?

Most of us have been there at some point. We’ve contemplated taking a portion of money from our IRA or 401k. Whether it’s to help pay the bills during tough times, or to help fund a much needed vacation, it can be tempting because an actual retirement date is so far away. Surely there’s plenty of time to build the account back up, right?

Borrowing from your IRA or 401k can be more costly than you think, and can have long-lasting effects on your retirement account value. If you knew ahead of time that borrowing that small amount of money now, could mean having to retire three to five years later, would you be as willing to make a withdrawal?

One very important consideration that may not come to mind, is the money withdrawn from the retirement account will no longer be invested. So there’s no chance of the money growing and working for you. Depending on market fluctuation and the investments, you could be missing out on growth or dividend income. Add to that possible penalties, fees and taxes for a withdrawal and it’s pretty clear that withdrawing from any retirement account is a decision not to be taken lightly.

Borrowing from an employer 401k is a better choice than taking from your IRA. Some companies make it easy and offer short-term loan options. Then, the loan is paid back via payroll deductions. What employees usually don’t scrutinize before signing the loan paperwork, are the fees and terms of the loan. Some employers charge fees or require that employees pay back the entire loan within 30 or 60 days. Plus, if the employee decides to leave the company before the loan is paid back, there could be  tax consequences and a 10% penalty.

The IRS allows you to borrow from your IRA once per year without penalties, if the money is paid back into the account within 60 days. However, if you miss the 60-day deadline or if you don’t plan to pay it back, you’re subject to federal income taxes, a 10% penalty and possibly state income taxes as well for those under age 59 1/2.

If you’re purchasing your first home, needing money for medical expenses or higher education, there are exceptions when borrowing from your IRA and more flexibility in these cases. Borrowing money to pay for items that depreciate, such as a car, is never a good option. Borrowing from your IRA or 401k should be a last resort and only in times of extreme need. The bottom line is, there’s no way to calculate just how significant the impact of a withdrawal could be on the final value at retirement.

Generally, a nation revalues its fixed exchange rate currency in response to positive economic growth and trade surpluses, as China did with the renminbi in 2005. If a nation runs trade deficits or suffers continuous capital outflows, they may find themselves obliged to devalue their currency. One way nations devalue free floating currencies is, intentionally or not, by inflation. Many economists assert that a fixed exchange rate muzzles inflation. However, the U.S. Federal Reserve has spent trillions buying securities through its Quantitative Easing program; officially, the federal government claims that the nation’s inflation rate has been around 2% annually. With all the new money introduced by the Fed over the past few years, the market dynamics of supply and demand dictate that high inflation or even hyperinflation is on the horizon for the U.S. dollar.

Thus, a “global currency reset” (GCR) would be either a revaluation or devaluation of a reserve currency. It could even mean that the world moves away from the reserve currency altogether. The most apocalyptic scenario would involve a hundred countries or more simultaneously devaluing their currency – an event unprecedented in world history but one not beyond the realm of possibility. Why would this cataclysm occur? It would be a currency world war where scores of nations compete to lower their exchange rate to boost their exports and remedy trade deficits. And according to some economists, currency wars don’t contribute to economic depressions — they end them.

As the U.S. dollar has been the world’s reserve currency since World War II, a GCR would have a profound impact on the dollar’s role in international finance and trade. Perhaps most significantly, the U.S., which has borrowed exorbitantly since the time of the Vietnam War, would see its borrowing costs skyrocket. European economists have conceptualized the term “exorbitant privilege” for the advantage that the U.S. holds over other nations by benefit of being the world’s reserve currency. By serving as the world’s reserve currency, the U.S. would never face a currency crisis (i.e., a sudden currency devaluation). A GCR would remove America’s exorbitant privilege. BRIC nations are already in the process of moving away from the dollar. For example, China has established bilateral trade agreements with with Australia, Japan, Thailand, Russia and Vietnam that allows for direct currency trade instead of converting to the U.S. dollar.

What does this have to do with precious metals? A GCR, which is already beginning, will devalue the U.S. dollar, causing inflation to rise rapidly. If Americans (or anyone else) have their wealth stored in the dollar, a fiat currency, inflation will rob them of their affluence. What will serve as a reserve currency? Gold and other precious metals have traditionally been a steadfast haven for protecting wealth. When fiat currencies collapse beneath their worthless weight, intrinsic assets like gold and silver will remain as a benchmark for the world’s currencies. Just look at the amount of gold China, India and the other BRICs have purchased since the Great Recession and draw your own conclusions.

Precious metal sages are fond of saying: “Don’t wait to buy gold and silver. Buy gold and silver and wait.” That’s what the world’s richest individuals do.

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