Typically, while you’re still employed, you can take a withdrawal from your retirement plan only in certain IRS-approved hardship situations, which may include the need to pay tuition or medical bills. But hardship withdrawals can come at a high cost. You’ll owe income tax on any pretax money you withdraw, including your own pretax contributions, any contributions from your employer, and any investment earnings. If you’re under age 59½, you’ll probably also have to pay a 10% federal penalty, and possibly a state penalty, on a withdrawal.
Depending on your plan’s rules, you may also be able to borrow money from your plan. You’ll typically pay a lower interest rate than you’d pay on other types of borrowing, like a credit card. But the loan might trigger fees, and you may have to pay back the full amount you borrowed if you leave your job.
Anything you take out of your retirement savings now could mean less money for your future. This goes for whether you take a hardship withdrawal or a loan. Here are a couple hypothetical examples.
Josh is 25. Let’s say he withdraws $10,000 out of his retirement plan today. If he were to leave that $10,000 in the plan, it could grow to $102,857 by the time he hits 65.
Consider keeping enough cash in an emergency fund to cover three to six months of living expenses. When you have an emergency fund on hand, you might not need to tap your retirement accounts or other long-term savings for short-term cash needs in the event of a financial emergency, like a job loss or high medical expenses.