Early Withdrawal from a Retirement Plan Has Its Drawbacks

If you need cash, withdrawing money from your retirement plan should be avoided, if possible.  With some exceptions, distributions are subject to a 10% penalty in addition to any income tax that ordinarily would be due on a withdrawal if made before age 59½. Further, you will lose the potential tax-deferred future growth on the amount withdrawn.

With a Roth account, you can withdraw up to your contribution amount free of tax and penalty; however, you will forfeit the potential tax-free growth.

Instead, if allowed, you may want to consider taking an employer-sponsored plan loan, a 401(k) for example.  Of course you will have to pay it back with interest along with regular principal payments.  The good news is that you will not be subject to current taxes or penalties.

Please contact us if you have questions about potential taxes and penalties on early retirement plan withdrawals. We also can help you determine if there are better options available for meeting your cash needs.