More than half (52%) of Americans have tapped into their retirement savings early, according to a recent survey from Magnify Money. However, there are many major reasons to not raid your 401(K) ahead of schedule.¹
Americans have raided their retirement savings early to cover the following expenses:¹
Down payment on a home
Pay off college
Pay off debt
Almost half of Americans surveyed have never used money from their retirement account.¹
Have not withdrawn money from their retirement savings early
Millennials are most likely to withdraw money from their retirement fund.
Older savers are less likely to withdraw money from their retirement fund than younger savers. Fifty-four percent of millennial savers (ages 22 to 37) advise they’ve taken an early withdrawal from a retirement savings account, compared with 50% of Gen Xers (ages 38 to 53) and 43% of baby boomers (ages 54 to 72).²
5 reasons to never take money from your retirement account.
PENALTIES AND FEES
With a 401(K) plan, taking money out before turning 59½ can result in a 10% penalty. And if you take out a significant amount of money at once, those withdrawals could push you into a higher tax bracket since you'll have to include withdrawals as income on your tax return.¹
WITHDRAWN FUNDS CAN'T GROW
The longer your money is invested in the market, the more you’ll have in the end. That’s thanks to compound interest, in which any interest earned then accrues interest on itself. If you started investing $250 a month at 25, you’d accumulate around $879,000 by 65, assuming an 8% return on investment. But if you start at 35, you’ll have just over $375,000.³
FREEZE YOUR ABILITY TO CONTRIBUTE
You’re typically subject to a six-month waiting period where you can’t make any new contributions. This six-month delay creates a long wait before it’s even possible to get your retirement savings back on track.³
Federal law gives 401(k)s and other “ERISA-qualified plans” exclusion from bankruptcy. That means you don’t run the risk of having your 401(k) taken by a bankruptcy court to pay creditors.³
WITHDRAWALS CAN NOT BE REPAID
Once you take a hardship withdrawal, you can’t just save up money and deposit it back into your 401(k) or 403(b). Contributions to workplace plans can only come from payroll deductions.³
If you start saving early for retirement, do so consistently throughout your career and leave the money in your account, you’ll have a far healthier retirement account than someone who borrows from their retirement fund early. Building up an adequate emergency fund is the best way to stay out of your retirement savings.