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Tuesday Tip: Don’t Withdraw Retirement Funds Early

Withdraw RetirementIf you’ve been able to get some money put aside for retirement, congratulations! It’s important to always be preparing for when you’ll stop working. However, it can be tempting to withdraw retirement money early for getting rid of debt or using as a down payment. This is a costly mistake, but the consequences aren’t always clear. 

Why You Shouldn’t Withdraw Retirement Funds Early

When presented with a financial problem, many consumers look for a quick fix to make the problem go away. One dangerous quick fix is to use money meant for the future to solve issues in the present.

The legal age at which you can withdraw retirement funds is 59½. Before then, any withdrawal will come with stiff tax penalties. Any money taken from a 401(k), IRA, or other retirement account is subject to a 10% tax penalty in addition to paying the standard federal tax on retirement withdrawals.

Additionally, you’ve already earmarked this money for the future. To put that at risk undoes all your progress and reduces the potential for your funds to grow. If you withdraw retirement funds early, it costs you now and it costs you down the road. That’s why it’s so harmful to use retirement money for getting rid of debt.

Alternatives to Early Withdrawals for Growing Savings

Rather than taking a hit by using retirement funds for a downpayment, exercise patience and save up instead. There are a few ways to come by extra cash without dipping into your retirement fund. Here are a few ideas that may work for your situation.

  • Reworking Your Budget – Examining your budget and looking for areas to cut expenses is essential when you need extra cash. You will likely have to drastically reduce discretionary spending on things like entertainment or clothes. Try using a financial planning worksheet if you’re struggling to figure out how to reduce expenses.
  • Selling Unused Household Items – There are probably a few appliances or sporting goods in your garage or attic that aren’t being used. With Craigslist or eBay, it’s easier than ever to turn those items into cash quickly.
  • Reducing Lifestyle Expenses – Your rent and your car payment are probably among the biggest expenses you have each month. If you’re trying to save up for a big financial step or just need to reduce large debts, reducing one or both of these will speed up the process. If possible, downgrade or sell your car. Moving is an extreme option, but if you can save hundreds in rent each month, it might be worth the effort.

Debt Relief Alternatives to Withdrawing Retirement Funds

If your purpose for withdrawing retirement early is paying off a debt quickly, there are other methods which won’t damage your future financial outlook as much.

One option is to consolidate debt. This can be done in a variety of ways, and it’s certainly a better option than sacrificing your future comfort. You can use a consolidation loan, balance transfers, or a debt management company to help ease the burden of your debt. With all of these options, you work toward making your payments lower and reducing interest. It’s not a quick fix, but it leaves retirement intact and growing so your future is more secure.

If you’d like help growing savings or reducing debt, call American Consumer Credit Counseling today at 800-769-3571.

ABOUT AUTHOR / Andi

Andi is a Marketing Assistant at ACCC. He is passionate about supporting financial literacy efforts and helping to educate people on the Talking Cents blog!

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