The Consequences of Early Retirement Withdrawal


When it comes to your retirement savings, adopting a long-term perspective is key. The old adage “time is money” has never been truer. You may think you’d benefit from an early retirement withdrawal, but did you know there are tax penalties, and you’ll also lose valuable time for your money to potentially grow for your future?

So, what exactly will you give up with an early 403(b) retirement withdrawal? Let’s take a closer look to find out:

What is an early withdrawal?

If you receive distributions from your retirement account before reaching age 59 ½, they are considered early distributions, and you will likely be subject to early withdrawal tax penalties.

What will it cost me?

Plan Withholdings 20%

Your retirement plan is required to withhold 20% of your retirement savings for federal income taxes, and you may potentially owe state income taxes depending on where you live.

IRS Tax Penalties 10%

Early distributions are typically subject to an additional 10% tax and must be reported to the IRS.

Potential Forfeited Savings 30%

Let’s say you take a $10,000 early retirement withdrawal. GuideStone® is required to withhold 20% retirement plan withholding or $2,000 in this example. During tax time, you will owe an additional 10% IRS penalty tax if it’s an early distribution which is an additional $1,000 for this withdrawal. Essentially, you may be responsible for 30% in taxes (in this case, $3,000). That means, you will be left with only $7,000 in your pocket when you requested $10,000 — and that’s still before any required state income taxes as well depending on where you live.

If you want to pocket $10,000, you will have to initially request a higher amount for your withdrawal. Keep in mind the 20% withholding and 10% penalty tax applied to this new request (as well as potential state income taxes) will ultimately result in a higher number owed overall in taxes.

Ask yourself: Is a withdrawal now really worth forfeiting thousands of dollars in withholding and tax penalties?

Potential Forfeited Growth Could've, would've, should've?

Rather than taking a $10,000 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 $32,071.35.

Ask yourself: Is a withdrawal now really worth forfeiting thousands of dollars in potential growth?

Time IS money.

Are there any penalty exceptions?

There are a few exceptions to early withdrawal penalties. You are not subject to early withdrawal penalties when taking distributions from your retirement account if any of the below exceptions are applicable to your situation. But you should still carefully weigh the consequences of accessing your money before retirement.

  • Reach Age 59 ½
  • 72(t) Payments
  • Death and Disability
  • Reservist Distributions
  • Age 55 (Early Retirement)
  • Medical Distributions (If Eligible)
  • Minister’s Housing Allowance
  • Satisfy a Federal Tax Levy
  • Distribution of Roth Elective Deferrals (Not Earnings)
  • Qualified Domestic Relations Order (QDRO) Distributions

Do I have any other options besides a withdrawal?

The majority of GuideStone retirement plans offer a loan as an option. We recommend this as a preferred alternative to a withdrawal. However, keep in mind failure to pay your loan back could result in adverse tax consequences. To find out more about loan details and eligibility, contact us at 1-888-98-GUIDE (1-888-984-8433) to speak with a customer solutions specialist about your options.

Your future is important — be prepared.

Remember, it’s your retirement account for a reason — treat it like one!

Carefully consider the consequences of taking an early withdrawal so you don’t lose money and time for potential growth. It’s best to stay invested, keep saving and plan ahead for a confident financial future.

To learn more about early withdrawal penalties and other financial considerations, contact GuideStone at 1-888-98-GUIDE (1-888-984-8433).