Why Pulling From Retirement Accounts Early Will Cost You In The Long Run

When money is tight, it can be tempting to want to pull out money from retirement accounts. When retirement seems far away and you need the money now, withdrawing from your accounts early may seem like the right decision. But, there are penalties that you need to know about early retirement withdrawal and how it will cost you in the long run.

What is an early withdrawal?

  • Made to a beneficiary on or after the death of the participant.
  • Made because the participant has a qualifying disability.
  • Timely made to reduce excess contributions.
  • Made on account of certain disasters for which IRS relief has been granted.
  • Other hardship withdrawals

For a full list of exceptions, see the IRS website. Hardship withdrawals are defined as an immediate and heavy financial need and the account funds are necessary to fund that financial need.

What are the penalties for withdrawing early from my retirement accounts?

From your 401(k)

From your traditional IRA

From your Roth IRA

What is a 401(K) loan?

Another benefit of using a 401(k) loan instead of an early withdrawal is that you don’t have to worry about credit checks affecting your credit score or getting denied. Similarly with 401(k) early withdrawal, you can borrow up to 50% of your vested balance OR $50,000. Generally, you are given five years to pay back a 401(k) loan.

Note that you are not able to take out a loan from a traditional or Roth IRA.

It’s not only the penalties and taxes that will cost you in the long run

Before you decide to take money out of your retirement accounts, it’s best to speak with a financial advisor. They may be able to give you advice that doesn’t involve early withdrawals and will help save you money.

Originally published at https://www.seniorfinanceadvisor.com.

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