Yahoo Finance 4 Biggest Money Withdrawal Mistakes Affecting Your Retirement Dollars
Building a sizable nest egg takes careful planning. Socking away as much money as you can, getting your maximum employer match and making good investment choices are all important steps. But how and when you take your withdrawals can have an even bigger impact. This is because factors such as taxes, penalties and the loss of compound interest can cripple even a well-planned retirement strategy.
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Here are some of the biggest money withdrawal mistakes that should be avoided at all costs, as they can severely impact your retirement dollars.
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Withdrawing Before Age 59 ½
If you take money out of a retirement plan before age 59 ½, you’ll owe a 10% early withdrawal penalty. This is in addition to the ordinary income taxes you’ll owe on distributions from most plans, with the exception of Roth IRAs and Roth 401(k) plans. In a high-tax state like California, for example, between federal and state taxes and the early withdrawal penalty, you may lose more than 60% of your withdrawal.
There are some exceptions to this rule. For example, if you separate from service from your employer and you are at least 55 years old, you’re allowed to take withdrawals from your 401(k) plan without incurring a penalty, although you’ll still owe taxes on non-Roth distributions. It’s still not advisable to withdraw from your retirement plan at such a young age, however, as you’ll be losing decades of compound interest on your withdrawals.
Imagine that you take out a “small” withdrawal of $5,000 from your retirement plan when you’re age 50. If you had instead kept that money in your tax-deferred retirement account and earned 8% on it annually, by the time you were 80, that money would have grown into $50,313, representing a return of more than 10x your original investment.
If you need incentive to keep your money in your retirement account, think about how that $5,000 withdrawal really means losing over $50,000 over time.
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Withdrawing for Non-Emergencies
Your retirement fund should be reserved for your nest egg and nothing else.
However, there are some situations in which you may be tempted to take money out of your 401(k) or IRA for unexpected costs. If you don’t have a dedicated emergency fund, for example, you might be forced to raid your retirement accounts to get those needed funds. In a worst-case scenario, at least you can avoid the early withdrawal penalty for specific financial emergencies, such as disability or large medical expenses.
But taking money out of your retirement accounts for non-emergencies, such as a new car or home repairs, is a bad move. Your retirement account will be permanently reduced, and you may have to pay both taxes and penalties.
Taking Out Roth Contributions
One of the benefits of making Roth contributions, whether to an IRA or 401(k), is that you can always take out what you put in without paying any taxes or penalties. This offers great flexibility to account owners, some of whom view their Roths as enhanced emergency funds.
But the truth is that even if you don’t have to pay anything to take your contributions out of a Roth, you’re still going to suffer the same long-term financial consequences — specifically, you’ll be missing out on years and perhaps decades of compound growth of that money. This is another case of how even things that are allowable are not always in your financial best interest.
Not Consulting With Tax and Financial Experts
Your retirement accounts may very well be your single most important source of income once you stop working. While Social Security will foot some of the bill, it was never intended to be 100% of your retirement income. With the average retiree earning just $1,910.79 per month from Social Security, your own personal savings will be of paramount importance.
Considering the implications of this, not working with tax and financial experts, like accountants and fiduciary financial advisors, leaves you at risk of making moves that have serious negative ramifications, such as those listed above.
The Bottom Line
It takes hard work and discipline to build up a nest egg that will support your entire retirement. In fact, most Americans fail. According to data from the Federal Reserve, the median retirement balance among those who have such savings was just $87,000 in 2023.
With that in mind, you’ll want to do anything you can to protect your retirement savings. Avoiding the mistakes listed above can go a long way toward keeping you on the right path.
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