In today’s age there’s little we can all agree on. But one common goal we all share is to enjoy a satisfying retirement. Achieving this goal is sometimes not so obvious, but there’s nothing more resourceful than a 401(k) to help you inch closer to making your dreams a reality. And if your employer is contributing funds to make this nest egg grow even more, all the better! But we are all painfully aware of how unpredictable life can be. What if something crazy happens and you need cash—and you need it now? If you’re tempted to crack open your retirement piggy bank early to help out with some pressing expenses, we urge you to read this first.
You may have heard that if you touch your 401(k) before age 59½, you’ll be hit with income taxes and a 10% early withdrawal fee. What you may not realize is how significant of a hit this is in the grand scheme of things—and you’re not alone. In fact, about 1 in 3 investors have taken withdrawals from their 401(k) before age 59½ (usually when changing employers), and it is taking a huge toll on their future retirement situation.[1]
Today, we’re here to give you a reality check. If you are considering cashing out your 401(k) early, consider the following, think twice, and take the time to search for alternatives.
The Immediate Consequences Of Cashing Out Your 401(k) Early
Let’s look at a hypothetical example. Bob is 40 years old, runs into some financial trouble, and decides to cash out the $50,000 he has saved over the past 20 years.
Bob understands he’ll have to pay some penalties and taxes, but he doesn’t take the time to actually run the numbers. He makes the withdrawal, checks his bank statement, and is shocked at what he sees.
After paying 24% in federal income taxes, 6.5% in state income taxes, and a 10% early withdrawal penalty, Bob’s $50,000 has dwindled to $29,750—just over half of his original 401(k) savings.
And those are just the immediate consequences.
The Long-Term Consequences Of Early Withdrawals
Bob also just erased all his momentum from 20 years of tax-free growth. He was at the point where his account was starting to snowball. He was earning interest off his interest. Now he has to start again from scratch; and at age 40, he has a lot less time to rebuild that snowball effect.
Even worse, after realizing he made a huge mistake, Bob did some investigating and realized he had other options available to him. It turns out that the withdrawal (and all the consequences) wasn’t necessary after all.
It was a costly mistake that could have been avoided.
Don’t Make Bob’s Mistake
It’s hard to make rational decisions when emotions are running high, so before you make any rash decisions, we highly recommend speaking to a financial advisor. If you ever find yourself in a tough spot financially and are considering cashing out your 401(k), let us help you navigate your other, less financially devastating options (such as taking a loan for your 401(k) or taking a hardship withdrawal).
Have a list of questions around your finances? Thinking about your retirement situation?
Let’s chat.
Whether you’re asking questions about when you can retire, how to manage your investments, or if you have enough to leave the impact you want for your family and community, we’re here to help. Use the calendar below to schedule a 15 minute introductory call directly with either Sam, John, or Ryan - we'll use this time to get to know you and your needs and talk about the retirement planning obstacles you may be facing.
[1]https://www.fidelity.com/viewpoints/retirement/cashing-out
