Is An Early Withdrawal a Good Idea?

If you took the important step to open a retirement account years ago, and you’ve been faithfully saving ever since, we want to congratulate you on smart, responsible financial planning. Many people don’t think about retirement until much later, so you’re ahead of the game.

But at some point, you might face a situation in which you need access to quick funds. While many people understand the importance of saving for the future, most don’t stop to think about the cost of withdrawing from those savings. After all, it’s your money, right? And your retirement account even allows for early withdrawals, under certain circumstances like…

• You become disabled
• You face significant medical expenses
• You lose your job and need to pay for health insurance until you find a new one
• You need a down payment for a home (subject to a $10,000 limit, and you can only use this exception once)
• You are subject to a Substantially Equal Periodic Payment plan (SEPP)
• You need money for college tuition (for yourself or a dependent)
• You separate from the employer who sponsors the retirement plan
• You’re subject to a Qualified Domestic Relations Order (QRDO)
• You need to reduce excess contributions
• You need to reduce excess elective deferrals

These exceptions do exist, and can allow you to withdraw funds without triggering the usual 10 percent penalty from the IRS. But just because you can, doesn’t mean you should.

When you withdraw the funds, you might promise to repay yourself over a certain period of time. And it’s true that you can replace the amount withdrawn, in many cases. But there’s one thing you can’t replace: You will never be able to make up for lost time. For each day that those funds are missing from your account, you are missing out on compounding interest. There is really no way to get that back.

If you’re facing a situation in which you need emergency funds, investigate all of your options first. Hopefully you can locate another source for that money. Above all, this situation underscores an important financial planning lesson: Planning for the future involves much more than just saving money. That’s important, but so is anticipating and preparing for emergencies.

As you continue to plan for retirement, meet with us regularly to discuss your level of emergency preparation. We can help you round out your financial plan with strategies to handle almost anything life throws at you.