The Pros, Cons and Complexities of Early Retirement Account Withdrawals

The temptation to dip into retirement assets early can be powerful, especially during financially stressful circumstances. Unexpected job (and income) loss. A huge college tuition bill. A disability or health issue that cuts into earning power and brings unanticipated medical expenses. These are among many reasons that people might consider tapping into their retirement accounts — IRAs, 401(k)s and the like.

These types of accounts were designed to be treated much like a produce crop. Plant seeds. Provide light, water and fertilizer consistently. Let grow. Harvest when ripe. With retirement accounts as with crops, there are opportunities to harvest prematurely but also, potentially, consequences for doing so.

“Generally speaking, tapping into your retirement accounts early is a bad idea,” says FPA member and CERTIFIED FINANCIAL PLANNER™ professional Jonathan P. Bednar of Paradigm Wealth Partners in Knoxville, TN. “There is a reason Albert Einstein called compounding the eighth wonder of the world. Letting your money grow for you for the long-term and avoiding the temptation to access that money early can [pay] extraordinary dividends.”

“When you see how much money one dollar can turn into over 30 years, it’s easy to justify leaving those assets alone until retirement,” adds FPA member Leon LaBrecque, CFP® of Sequoia Financial in Troy, MI.

Under federal rules, people with a qualified retirement account such as a 401(k) or a traditional IRA (Individual Retirement Account) can start withdrawing funds from their account at age 59½ and must take distributions from their account starting at age 72. Withdrawing money from a qualified retirement account prior to age 59½ means the account holder not only will likely have to pay state and federal income tax on the amount withdrawn, they also will be subject to a 10% tax penalty, unless the money is used for certain “excluded” purposes. Those exclusions include:
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