Raiding your 401(k) when you are young defeats the purpose of saving early for retirement, yet millions of Americans fall into the trap. According to a recent article by time.com, 30 million people tapped their retirement money in the past year. Research indicates Americans use their 401(k) and other retirement plans as they would emergency funds. With a few exceptions, it is a terrible idea to draw from a retirement savings plan early. In fact, most financial experts encourage people to make catch-up contributions to their 401(k) after age 50. Without a doubt, there are major consequences and downsides to taking money out of an employee-sponsored or other retirement account.
Incurring a tax penalty
According to time.com, baby boomers are particularly quick to withdrawal money from a retirement account. They also incur tax penalties such as the 10 percent early withdrawal imposed by the IRS when people take unqualified distributions from traditional retirement accounts. With a Roth IRA, retirement savers can take out their contributions. In some cases, you can also take out money to pay for college or a first home without paying the 10 percent fee. A survey by bankrate.com revealed 26 percent of baby boomers feel they have lost control of their personal finances. Seventeen percent used retirement savings to pay for financial emergencies.
Stunting the growth rate
Although baby boomers are the worst offenders when it comes to raiding retirement savings, experts say millennials in their 20s and 30s also pull money out early. Eleven percent of millennials believe their financial plight has deteriorated in the past year. Eight percent of millennials raided their retirement savings. By taking money out of retirement in your 20s and 30s, you stunt the growth of your retirement fund.
Many people are still dealing with the aftermath of the recession. Whether a job loss, pay cut loss of home, you likely experienced some financial setback due to the recession. Although it is tempting to give up, continue to invest and save. According to time.com, 77 percent of post-crash cynics have zero confidence in financial institutions while 41 percent no longer save.
For more information about how to invest and save for retirement as well as cover financial emergencies without decimating a retirement account, please contact us.