Early Withdraws From Your Retirement Could Cost More Than You Think

We’ve all heard the term: “Life happens.” Sometimes when life throws an unexpected curveball our way, we are forced to make some tough decisions. Some decisions are harder than others. Like, for example, when we are faced to make decisions that will impact our future financial stability. Those are the kinds of decisions that bring on migraine headaches, high blood pressure and will leave you second guessing yourself for years to come.

What do you do when you need to come up with some extra cash to do a major home repair or what if a family crisis has you struggling to make ends meet? If you need to find funds fast there are many options available: credit cards, payday loans, home equity loans … even borrowing from family.

Some people opt to tap into their retirement funds and, for the most part, are able to rationalize their actions with deductive reasoning:

  • The money is just sitting in an account, I may as well make good use of it now rather than later.
  • I can put the money back in time for my retirement.
  • It’s just a few thousand dollars, what difference will it make?

Well, the truth is, dipping into your retirement fund could have a huge impact on our present economic stability due to the tax implications – one that could send shockwaves through your retirement planning strategy for years to come. If you are younger than 59-½ years old and are considering an early deduction from your retirement account, here are some issues you should consider.

You Will Be Taxed

Every dollar you remove early from your retirement plan will be taxed as ordinary income – just like wages. For example, if you are in the 25 percent marginal tax bracket, you will lose 25 cents from every dollar you withdraw.

Beware Of Penalization

If you decide to take money from your IRA or retirement plan and are younger than retirement age (59-½), be prepared to incur a 10 percent “early withdraw penalty.” So now every dollar that you withdraw costs an extra 10 cents on top of the ordinary income tax. If you’re in the 25% bracket, that $10,000 withdrawal from your IRA can cost you as much as $3,500 in extra taxes and penalties.  There are several exceptions to the additional 10 percent early distribution tax, such as:

  • Help you purchase your first home.
  • Cover certain medical or educational expenses.
  • Assist you if you are considered completely and permanently disabled.

You Have Other Options

If your 401(k) or other qualified retirement plan is your only (or best) option, ask about securing a temporary loan. Certain stipulations do apply and you will be obligated to repay the loan over a period of time. That said, you may find this option to be a more cost effective solution for you than the other choices.

Don’t Make This Big Decision In Haste

Use this information to help you make your decision more clear. Before you move forward with the plan to extract money from your retirement fund, carefully review all your available options (such as the ones listed above) and consider whether the taxes and penalties are worth it. With a little reasoned thinking, you may find that your tapping into your retirement fund is in your best interest after all.

If you find yourself in a financial crisis, make sure you understand all of your options and their consequences. Don’t make a move without talking to a financial advisor who can help you see your entire financial picture.

 Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.