![]() That money then grows over time, thus increasing your retirement nest egg. When your investments pay dividends, those funds get reinvested into your account. Withdrawing from your account (either from hardship, unforeseeable emergency or otherwise) means losing compounding interest. The long-term impact of early withdrawals can follow you all the way through retirement. You will also lose out on any employer matching contributions for half a year, which may significantly reduce your earning potential. This essentially bars you from replacing the money quickly. Removing money from your account doesn’t just reduce its current balance, it also impairs your ability to grow investments through compounding interest.Ī hardship withdrawal may prevent you from contributing to your early withdrawal from your workplace retirement plan for at least six months, depending on the plan’s policies. The retirement implications of early withdrawalĪccount withdrawals don’t just impact your tax bill, they also hamstring your retirement savings goals. That’s even before factoring in the IRS penalty. 3 Your tax bracket is likely to decrease in retirement, which means pulling from your workplace retirement plan early could result in paying more in tax today than you would if you left the money untouched. There’s an additional 10% penalty on early withdrawals. Your early withdrawal gets taxed as regular income, which will range between 10% and 37% depending on your total tax-eligible income. Worse yet, the penalties you might have to pay for early withdrawal could be higher than what you’d pay in tax during retirement. ![]() This means the IRS is going to want you to pay your tax bill, in full, for the money you withdraw early. After all, you’re growing your retirement nest egg tax-deferred with a workplace retirement plan. If your retirement account requires you to be age-eligible, withdrawing from your account before that age means facing significant tax penalties. Other similar extraordinary and unforeseeable circumstances resulting from events beyond you or your beneficiary’s control (for example, imminent foreclosure or eviction from a primary residence, or to pay for medical expenses or prescription drug medication).Funeral expenses for your spouse or dependents.Property loss caused by casualty (for example, damage from a natural disaster not covered by you or your beneficiary’s homeowner insurance).Illness or accident expenses for you, your beneficiary, or you or your beneficiary’s spouse or dependents.If, however, you are still employed with your employer, you must qualify for an “unforeseeable emergency” to take a withdrawal without paying a penalty to the IRS. If you leave your job or retire, you may be able to withdraw funds without penalty - even if you’re under retirement age. Some types of retirement plans (like 457s), do allow for “early” withdrawals. The IRS also prohibits you from withdrawing more than you need to cover the hardship plus local, state, and federal income taxes or penalties. If you decide you take a hardship withdrawal, you may not be able to contribute to your workplace retirement plan for six months or more. ![]() Down payment or, in some cases, repairs to your principal residence.Medical bills not reimbursed by your insurer for you, your spouse or dependents.Funeral and burial expenses for parents, spouses, children or dependents.Payments to avoid foreclosure or eviction from your home (excluding mortgage payments).College tuition payment for yourself, your spouse, dependents or non-dependent children.Hardship withdrawals are available to people with specific financial needs as defined by law. To withdraw from some workplace retirement plans, you must first qualify for a hardship withdrawal. Nor is it as straightforward as selling equities in your portfolio. It’s not ideal to pull from these funds early, however. After all, your retirement savings account may seem like a prime source of money when you need it in a pinch. When you’re in need of financing, it may seem like withdrawing from your workplace retirement plan is a viable option. Here’s what you need to know as well as some alternatives that might be a better fit for your finances. There are several potential outcomes when you withdraw from your workplace retirement plan early. Which consequences you’ll face depends on what type of plan you have, when you withdraw and why you are using your retirement plan funds. In some cases, withdrawing from a retirement plan may not have a major impact in others, the consequences may be significant from a financial perspective. Sometimes this may take the form of withdrawing early from your workplace retirement plan. Unexpected hardships or emergencies may require us to think of alternative sources of getting money quickly.
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