Retirement account savers frequently think about withdrawing their retirement savings when they are short of money, due to unemployment, illness, big item purchase or emergencies arise. However, taking an early retirement withdrawal can comes with stiff taxes and penalties.
These are the reasons why savers should not take early retirement withdrawal.
- Early distribution penalties, 10% penalty in addition to any income taxes that individual owe on the withdrawal, apply when individual withdraws money from a retirement plan before age 59 1/2.
- The IRS treats distributions as ordinary income. Individual is taxed at the marginal tax rate. Depending on individual other income and deductions, he/she could end up paying 25% or more of the withdrawal in income tax.
- Retirement accounts grow over time by compound interest. Taking out funds from retirement accounts will reduce the retirement funds for retirement.
- Creditors can not go after individual’s retirement accounts. Retirement funds are legally protected.
- Retirement funds are only for retirement.
Therefore, retirement account savers should try to find funds from other sources before deciding to do early withdrawal of funds from retirement accounts.