Don’t Do This

There is one financial transaction that I strongly discourage clients from doing and here’s why . . .

Do not withdraw from your retirement accounts early! Here are the reasons why I hear most people want to withdraw from their retirement accounts:

  1. Purchase a house
  2. Pay for expenses while unemployed
  3. As a temporary loan, with the intentions of replacing the money
  4. To pay for unforeseen expenses
  5. You need the money for (fill in the blanks)

The main reason to not do this is because it is one of the major reasons for tax problems. Aside from early withdrawal penalties, additional income taxes are accessed  on the balance, withholdings are not usually taken or not enough, and you may end up increasing your income, which sometimes pushes you into an even higher tax bracket. Once you add up all of the penalties and taxes, then the amount withdrawn can disappear by half for some.

What are some other options as you are most likely withdrawing your retirement funds because you desperately need the money and do not have a cash cushion? If you are employed, you may be able to obtain a retirement plan loan from your employer, which is not a taxable event. Alternatively, you might be able to borrow the money from your home’s equity. In some cases, you may be able to delay what you need the money for if not needed for emergency purposes.

Over the long-term, this is why I stress slowly building up a cash emergency fund. Yes, it’s boring and unexciting, but you will be glad you did when the time comes.

If you like what you just read, then don’t hesitate to forward/share with your friends and/or click like!

Make sure to subscribe to our weekly emails to receive practical business, financial and tax strategies! Sign Up Now!