For many people, a 401(k) or retirement savings can be difficult. It's often seen as money that's just sitting there and you can't use it for another couple of decades. It may be tempting to make a small, early withdrawal so you can use it right now. However, this may have a huge impact on your overall retirement savings. Any withdrawals that happen before you turn 59 and a half years old are considered 'early.'
Here’s why you shouldn’t withdraw early:
PENALTIES
For a traditional 401k, you will owe 10% in penalty fees if you withdraw early. This means, if you pull out $5,000, you will owe $500 in penalties. The same goes for a Roth account where you will have to pay penalties on the earnings from your contributions.
TAXES
Any time you make an early withdrawal, it's taxed as if it were regular income. Using the above example, if you withdraw $5,000 and are in the 25 percent tax bracket, you will owe $1,250 in taxes. This is in addition to any state taxes that may be owed. On a Roth IRA, there are no taxes because you have already paid your taxes on these funds. These additional taxes also have the potential to affect your tax bracket come April.
LOSING OUT ON INTEREST
Withdrawing early is essentially stealing from your future self. When money is removed from your account, it's no longer earning interest and there's no way to make it up down the line.
There are some exceptions to early withdrawal which include, but are not limited to:
- Disability
- Certain higher education expenses
- Called to active military duty
- First time home buyer program (limited to $10,000 per person)
- Medical costs that exceed 7.5% of your adjusted gross income
However, it should always be your goal to utilize regular savings accounts and leave your retirement alone.