About this video
Mr. V examines the key things to Consider before Taking Money from Your Retirement Account. Before you decide to withdraw money, though, think twice.
Tapping into your retirement account should be the last resort.
Penalties and Taxes
The money you put into your retirement account comes with tax advantages. It is also
understood that you agree to use that money for retirement after you turn 59 1/2. If you
withdraw money before that age, you could be hit with penalties. First of all, you are assessed a 10% penalty for withdrawing your money early.
Next, you have to pay taxes. When you put money in a traditional IRA or a standard 401(k)
account, you receive a tax deduction. Your tax payments are deferred. Once withdraw the
money, though, you have to pay taxes on it. You pay taxes on the amount of your withdrawal at your marginal income tax rate.
What about Loans?
One way you can avoid the penalties and taxes is to take out a loan against your retirement account. If your employer allows loans against your 401(k) (not all employers do), you can borrow money from yourself. You have to pay interest, but you are paying it to yourself. You might also have to pay a loan origination fee. However, it can be less than what you would pay in penalties and taxes.
Missed Opportunity
The biggest reason to avoid tapping into your retirement account before you retire, though, is the missed opportunity. If you take money out of your retirement account, it’s no longer sitting there, earning compound interest. Part of the reason that a consistent retirement savings plan is so powerful is due to the magic of compound interest.