It can be tempting to withdraw from your retirement early, but it’s important to consider what could be at stake before you do. Early withdrawal penalties, tax consequences and missed opportunities for money growth could reduce your long-term savings.
Life circumstances may have you considering early withdrawal, but let’s take a closer look at what this could mean for your financial future.
What are the potential consequences of early withdrawal?
Distributions taken from your retirement account before age 59½ are considered early distributions, which are likely subject to early withdrawal tax penalties and other financial consequences, such as:
A single sum distribution from your retirement plan requires the plan to withhold 20% of your retirement distribution for up-front mandatory federal income taxes. When you file your taxes, you may owe more taxes or less taxes, depending on your tax bracket. Also, depending on where you live, you may potentially owe state income taxes.
Early distributions are typically subject to a 10% federal tax penalty and must be reported to the IRS.
An Example of Potential Forfeited Savings
Let’s say you take an early withdrawal of $10,000 at 45 years old. Your retirement plan administrator is required to withhold 20% for federal income taxes ($2,000 in this example). At tax time, assuming you do not qualify for any exceptions, you would owe an additional 10% early distribution penalty on your federal taxes ($1,000 in this example).
After the 20% mandatory withholdings and the 10% early distribution penalty, you would be left with only $7,000 after initially requesting $10,000 — and that’s before any potential state income taxes.
If you need $10,000, you would need to withdraw a higher amount from your retirement account ($14,285 in this example).
Ask yourself: Is an early withdrawal worth paying thousands of dollars in taxes and penalties?
Potential Forfeited Growth — Could’ve, would’ve, should’ve?
To continue the example, rather than taking an early retirement withdrawal, let’s say you keep the $10,000 invested over the next 20 years at an assumed rate of return of 6% per year. This $10,000 could potentially turn into more than $32,000.1
Are there any early withdrawal penalty exceptions?
Sometimes, unforeseen life circumstances may lead you to consider an early withdrawal. Early withdrawals are not subject to penalties if any of the following exceptions apply to your situation. Nonetheless, it is still recommended to carefully weigh the consequences of accessing savings before retirement.
*These provisions are not available in all plans. See your plan administrator if you have questions.
Do I have any other options besides a withdrawal?
Some retirement plans may offer a loan option. If available, this is a preferred alternative to a withdrawal. However, failure to pay back a loan could result in adverse tax consequences.
It’s your retirement account for a reason — treat it like one!
Carefully consider the consequences of taking an early withdrawal to guard your savings and allow time for potential growth. It’s often best to stay invested, keep saving and plan ahead for a confident financial future.
To learn more about early withdrawal penalties, other financial considerations and potential loan options on a GuideStone plan, contact us at Info@GuideStone.org or 1-888-98-GUIDE (1-888-984-8433), Monday through Friday, from 7 a.m. to 6 p.m. CT.2
1This example has been prepared for purposes of illustration only, is hypothetical in nature, does not reflect actual investment results and is not a guarantee of future results.
2This information is provided for educational purposes only. This should not be considered tax advice. You should consult a tax professional to discuss your unique situation.