The Pros and Cons of Early Withdrawals from Retirement Funds

The Pros and Cons of Early Withdrawals from Retirement Funds

February 04, 2021

Should you withdraw your retirement plan money before you retire?

Not only are there penalties and tax consequences that come with withdrawing money early from your retirement accounts, but withdrawing money now could actually make it harder for you to reach your long-term retirement goals in the future.

Some 401(k), 403(b), 457, and IRA plans offer withdrawal flexibility. If your plan provides this choice, you must first pay attention to the rules.


To start, some basics…

Distributions from 401 (k) plans and most other employer-sponsored retirement plans are taxed as ordinary income, and if you take one before age 591/2, a 10% federal income tax penalty commonly applies.

Note that the 2020 CARES Act allows some one-time exceptions to penalties this year. Account owners can take a distribution of up to $100,000 from their retirement plan or IRA in 2020, without the 10% early withdrawal penalty that normally applies to money taken out before age 591/2. But remember, you still owe the tax.

In addition, 20% of the withdrawn amount is withheld for tax purposes. Generally, once you reach age 72, you must begin taking required minimum distributions.


Now, the fine print…

You may be able to take money out of your plan in your fifties or sixties, while still working, via an in-service non-hardship withdrawal. However, unless you roll these funds over directly to an Individual Retirement Account (IRA), you will receive a 10% penalty and a 20% tax withholding in the process.


The criteria for making withdrawals can vary…

Some retirement plans simply prohibit withdrawals, others will permit withdrawals when assets in your plan have accumulated for at least two years or when you are 100% vested in your account.


CONTACT US today to discuss how withdrawing funds from your retirement plan can affect your future.

None of the information in this document should be considered as tax advice.  You should consult your tax professional for information concerning your individual situation.