Saturday, February 22, 2014
It can be tempting to withdraw your retirement savings when you need cash, but this mistake can seriously jeopardize your future retirement income.
Besides taking a hit to your long-term savings, you will play income taxes and a 10% penalty for pulling the money out early. Here’s a hypothetical from Fidelity: a 30-year-old who cashes out a retirement account worth $16,000 will owe around $3,200 in taxes and $1,600 in penalties. His future retirement income will also drop an estimated $470 a month.
For those who don’t absolutely need the cash, their money is best left in their retirement account. Not surprisingly, younger savers with lower incomes are more likely to withdraw. 44% of those aged 20 to 29 cashed out compared to only 26% of those aged 50 to 59. 50% of those earning $20,000 to $30,000 in 2013 cashed out compared to only 13% of those earning over $100,000.
See Andrea Coombes, This Is a Retirement Saver’s Worst Mistake, MarketWatch, Feb. 13, 2014.