The consequences of raiding retirement savings for cash

If you need to raise cash in a hurry, it’s generally not a good idea to turn to your workplace retirement savings plan, such as a 401(k) or 403(b) plan, to meet a short-term need. When you take money out of retirement savings early to cover a financial emergency, you could end up owing penalties in addition to tax. Plus, you’ll have to save more in the future to make up for what you took out of the plan. There’s a way to prevent having to tap your retirement savings prematurely.
Hardship withdrawals, loans and a word on both
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.
The high cost of hardship withdrawals and loans
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.
Kyla, 35, also withdraws $10,000 out of her plan today. If she were to leave that money where it is, it could grow to $57,435 by the time she reaches 65.
An emergency fund can help cover unexpected expenses
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.
If saving three to six months of living expenses seems intimidating, you can start small by aiming to build a fund of at least $500 and go from there. You can build your savings back up whenever you take money out of the fund.
 
This material is for informational or educational purposes only and does not constitute a recommendation or investment advice in connection with a distribution, transfer or rollover, a purchase or sale of securities or other investment property, or the management of securities or other investments, including the development of an investment strategy or retention of an investment manager or advisor. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made in consultation with an investor’s personal advisor based on the investor’s own objectives and circumstances.
 

The information is provided for informational purposes only and is intended to engage you in thinking about your financial planning needs. Of course, each person's results will vary based on various factors, including, but not limited to, the products or strategy selected. There is no guarantee that results similar to those portrayed will be achieved. Certain products and services may not be available to entities or persons.

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