Four reasons not to raid your retirement savings

Your daughter is getting married. Your son’s tuition bills keep rising. Your side business needs an infusion of cash.

We’ve all been there. You need money, and you need it now. Question is, where to get it?

It may be tempting to just withdraw some money you’ve saved over the years in a 403(b), 401(k), individual retirement account (IRA), or another type of qualified retirement account. “Hey, I’ve got six figures just sitting there,” perhaps the thinking goes. “I know that money is supposed to be for my retirement, but would it really be so bad to pull some out early?”

The answer is almost always yes. The taxes and penalties associated with early withdrawals are onerous. The compound growth you’ll lose could set your retirement planning back by years. “Your retirement account is meant for one thing: retirement,” says veteran financial advisor Douglas Ornstein, a director with TIAA Wealth Management. “Early retirement withdrawals create a permanent setback that’s nearly impossible to fully recover from.”

Here are four reasons why you should leave your retirement money for retirement:

1. The tax hit is brutal.

The federal tax code intentionally makes early withdrawals painful because these accounts are meant to safeguard your retirement, not serve as emergency piggy banks. When you make early withdrawals from tax-deferred retirement accounts before age 59½, you pay federal income taxes on the full amount. Additionally, early withdrawals from all types of qualified retirement accounts—including earnings from Roth accounts—are subject to a 10% early withdrawal penalty. (The federal government does waive the 10% penalty under certain circumstances.)

You also pay applicable state and local income taxes on early withdrawals, and some states, such as California and Wisconsin, assess their own separate penalties on early withdrawals. “That $10,000 withdrawal,” says Ornstein, “could cost you $4,000 or more in taxes and penalties.”

2. You’re stealing from your future.

Every dollar you withdraw now cannot compound and grow over time. A $10,000 withdrawal at age 35 might seem manageable, but assuming a mere 6% average annual rate of return, that money could have grown to $77,000 by the time you reach 70. (Click here to calculate how much an early withdrawal could affect your retirement savings.) “Compound interest is your most powerful wealth-building tool,” says Ornstein. “Don’t sabotage it.”

3. You can’t make up for it with double-extra-large contributions later on.

Unlike regular savings accounts, 401(k)s, 403(b)s, and IRAs have strict annual contribution limits. If you miss those contribution years while you’re rebuilding what you withdrew, your retirement savings may not recover. “You’ve permanently reduced your retirement savings capacity,” says Ornstein. “Those contribution opportunities are gone forever.”

4. Better options usually exist.

Before touching retirement funds, explore alternatives: emergency savings, personal loans, home equity lines of credit, or 401(k) loans (which, while not ideal, at least let you pay yourself back). “Many financial emergencies can be solved without raiding your retirement savings,” says Ornstein. “And some so-called emergencies can actually wait.”

We’re here to help

Before you consider tapping your retirement savings, talk to a TIAA advisor who can help you explore better alternatives for your unique situation. Sometimes all it takes is one conversation to find a solution that protects your future while addressing your current needs. Don’t have an advisor yet? Schedule an appointment.