Retirement Savings: 4 Reasons You Should Never Touch Your Retirement Early

Dipping into a retirement fund before you’re 59 1/2 is one of the cardinal sins of financial planning. Not only do you get hit with a 10% early withdrawal penalty, but unless it’s a Roth account, any funds you remove will be taxed as regular income.

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But new rules in the Secure 2.0 Act allow younger workers to tap their 401(k)s and IRAs for up to $1,000 per year for emergencies without penalty. That can make your retirement fund a tempting place to turn to when your starter fails or your roof springs a leak. However, just because you can siphon off retirement savings to deal with unforeseen expenses doesn’t mean you should.

“Although new rules may make it easier to tap into your 401(k) for emergencies, it is highly recommended to avoid touching your retirement plan,” said William Rivers, founder and chief editor of Senior Strong. “Preserving your retirement funds, avoiding adverse tax consequences, maintaining future financial stability, benefiting from compound interest and accurately estimating future needs are all compelling reasons to prioritize the long-term security of your retirement plan.”

Here’s why you should leave it alone.

You’ll Trade a Small, Short-Term Fix for Big, Long-Term Losses

It can be hard to look beyond the moment when you can’t get to work until you can afford to repair your car. But the entire point of keeping a retirement fund separate from your household savings is that you will absolutely, positively need it later in life.

“Retirement plans are specifically designed to provide financial security during your golden years,” said Rivers. “Utilizing retirement funds for emergencies may provide temporary relief, but it jeopardizes your long-term financial stability.”

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After all, if you can’t cover a relatively minor emergency while you’re working, how on earth will you manage one after you stop earning income?

“By tapping into your retirement plan, you diminish the resources available to support you during retirement, potentially leading to financial hardships later in life,” said Rivers. “By refraining from accessing these funds prematurely, you ensure their growth and allow compounding interest to work in your favor, potentially resulting in a more substantial nest egg.”

That leads to the next reason.

You’ll Miss Out on the Full Potential of Compounding

Whether it’s money earning interest in a savings account or stocks set to reinvest dividends in a 401(k), compounding works by piling new gains on top of previous gains. Regular contributions help, but it will work its magic if you just leave it alone. It takes time to build steam — but if you pull money out, you’ll impede your most potent weapon.

“The power of compound interest cannot be overstated when it comes to retirement savings,” said Rivers. “By leaving your funds untouched, they continue to grow and benefit from compounding over time. Accessing your retirement plan prematurely robs you of this compounding effect, making it harder to achieve your desired retirement goals.”

Kendall Meade, a certified financial planner at SoFi, offers an example.

“If a 35-year-old took a $5,000 hardship withdrawal from a 401k, assuming 7% annualized growth, that $5,000 could have grown to $27,137.16 by age 60 if they had kept it invested. So now they are about $27,000 behind on their retirement savings. That money is no longer able to stay invested and continue growing for you.”

It Can Be a Crutch That Disincentivizes Healthy Saving Habits

The fact that legislators had to change the rules to allow for regular emergency withdrawals shows just how unprepared the multitudes are for even modest financial turmoil. If they had savings, they wouldn’t have to plunder their 401(k)s at the first sign of trouble.

“Instead of relying on your retirement account for unexpected expenses, aim to accumulate emergency savings in an FDIC-insured high-interest savings account,” said Laura Adams, MBA, a personal finance expert with “For instance, having a minimum of three months’ worth of living expenses would keep you safe if you lost your job or business income.”

The trouble with the new rule is psychology — if you can always just tap your 401(k) in the face of a real crisis, it becomes easier to lower the bar for what qualifies as an emergency that justifies raiding your savings. The best thing you can do with your retirement fund is forget it’s there.

There Are Other, Better Ways

If nothing else, treat the new early withdrawal penalty exemption as an absolute last resort. After all, you have options that don’t involve maxing out your credit cards.

Personal Loans

Interest rates are high, but borrowing from the bank is still cheaper than revolving debt and better than pilfering your retirement fund.

“Look into a personal loan,” said Meade. “Especially one with no fees.”

Put Some Retirement Savings in a Roth Account

After-tax Roth accounts have no immediate tax benefits like pre-tax 401(k)s and IRAs, which reduce your taxable income. The tradeoff is that since you’ve already paid taxes on the money you put in, the rules for taking it out are much more relaxed.

“With a Roth IRA, you are able to withdraw any of your contributions — just the money you contributed, not earnings — at any time without penalties or taxes,” said Meade.

Consider a Home Equity Loan or HELOC

Homeowners put money into an invisible piggy bank with every mortgage payment they make. If they make enough, they can draw from that fund when money is tight.

“If you have significant equity built up in your home, you can use a home equity loan or home equity line of credit to access this equity,” said Meade.

Borrow From Your Retirement Fund Instead of Stealing From It

Before you make an emergency withdrawal, consider a 401(k) loan. You can’t make new contributions until you settle up, and you have to pay interest on what you borrow — but you pay that interest to yourself.

“This is an option where you can withdraw money from your 401(k) but continue paying it back out of your paychecks,” said Meade. “This option does typically have a lower interest rate, but your money will no longer be invested and if you leave your job, you may have to pay it back at an accelerated rate.”

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