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Stuck in the Middle: Feeling guilty for draining your 401(k) early? You're not alone

According to a recent study by Bank of the West, one in three millennials are raiding their 401(k) and IRAs for down payments on homes.

Ed and Lisa Robleski moved to Texas with a dream.

They wanted to start a restaurant called “Red’s Famous Fried Chicken.”

“You get a big platter of chicken, mashed potato, corn, green beans, homemade biscuits,” Ed said. “I mean, it was beautiful. It was like eating dinner at grandma's house.”

Lisa and Ed Robleski

They cashed out much of their 401(k) retirement savings account to start the business in Tyler, Texas. The doors opened, but within months…

"We were out of business,” Ed said. “Fifty-thousand-dollars, gone.”

“I ran in the back of the restaurant and just started crying hysterically because I knew that that meant we had nothing,” Lisa said. “We didn't have jobs.”

They fought to get back on their feet. But then came a medical emergency.

“I had open heart surgery, a chest tube, four angioplasties and they still haven't fixed the left leg,” Ed said.

The bills started arriving. “Over $400,000 before my insurance kicked in,” Lisa said.

Again, they went into their 401(k) retirement savings – “$100,000 here, $50,000 there,” Ed said.

Both said they know the consequences of taking money out.

“We're at the age where we'd love to retire, and we don't ever see that happening,” Lisa said. “I will have to work till I die. I tell people that because we have no savings left.”

The Robleskis aren’t alone.

Millions of middle class Americans like them are tapping their retirement savings – before retirement.

It’s a dire situation for many Americans. Boston College’s Center for Retirement Research estimates that Americans pull $210 billion from their 401(k) and IRA – individual retirement account – plans every year for current living expenses.

Many of them are millennials.

According to a recent study by Bank of the West, one in three millennials are raiding their 401(k) and IRAs for down payments on homes.

Don Shelly, SMU finance professor

“It's millions of people, millions,” said Don Shelly, Southern Methodist University Cox School of Business finance professor. “It’s not good.”

Dipping into your 401(k) for any reason should be a last resort, Shelly said. But if it's unavoidable, such as for medical expenses or to avoid losing your home, you can take what’s called a hardship distribution.

WATCH: SMU professor on the pros and cons of dipping into your 401K

“The benefit of that is it avoids the 10 percent penalty … for early withdrawals,” Shelly said.

But plan participants, if not 59-and-a-half years of age, still must pay income tax on the withdrawal.

If it’s not an emergency, you can take out a loan from your account.

But, Shelly says, first consider this: “What's your plan to pay it back? And what are you borrowing it for? If I'm borrowing for down payment on a house, maybe that's a good investment, but how am I going to pay this back?”

For 401(k) participants, Shelly says he would recommend the following:

  • Find out if your employer has a 401(k) plan and participate in it.
  • Start saving early.
  • Maximize the amount your employer will match. It’s free money.
  • If you receive a pay raise, put at least some of raise into your 401(k)
  • Taking an early withdrawal is a last resort.
  • If you must make an early withdrawal, consider taking a loan that you can reasonably pay back.

Solid advice the Robleskis wish they had taken years ago.

“Hopefully somebody else will not make the same mistakes that we did,” Ed said. “We made some mistakes along the way … but we've got each other.”

Email: investigates@wfaa.com

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